Indian Indices Witness Selling as RBI Lowers GDP Forecast to 6.9%; Sensex Ends 286 Points Lower

Wed, 7 Aug Closing

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After opening the day on a flat note, share markets in India witnessed negative trading activity during closing hours and ended lower.

Barring IT sector and healthcare sector, all sectoral indices ended on a negative note with metal stocks, energy stocks and automobile stocks leading the losses.

At the closing bell, the BSE Sensex stood lower by 286 points (down 0.8%) and the NSE Nifty closed down by 93 points (down 0.9%). The BSE Mid Cap index ended the day down by 0.4%, while the BSE Small Cap index ended on a flat note.

Asian stock markets finished on a mixed note. As of the most recent closing prices, the Hang Seng was up by 0.1% and the Shanghai Composite was down by 0.3%.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) today announced a 35 basis points cut in repo rate in its third bimonthly policy review of this financial year. After the cut, the repo rate now stands at 5.40%.

The reverse repo rate now stands at 5.15%. The RBI press statement said four out of the six members of the MPC voted in favour of a 35 basis points (bps) rate cut in this monetary policy meet.

RBI in its release said global economic activity has slowed down since June 2019 MPC meeting amid elevated trade tensions and geopolitical uncertainty. RBI also trimmed India's GDP growth forecast for this financial year to 6.9% from 7% earlier.

The release also stated that the transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last MPC meeting. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current phase.

The apex bank projected CPI inflation at 3.1% for Q2FY20 and 3.5%-3.7% for the second half of FY20, with risk evenly balanced. The MPC noted that inflation is currently projected to remain within the target over a 12-month ahead horizon.

RBI also said high-frequency indicators of services sector activity for May-June present a mixed picture. Tractor and motorcycle sales, indicators of rural demand, continued to contract. Among three indicators of urban demand, passenger vehicle sales contracted for the eighth consecutive month in June.

However, domestic air passenger traffic growth turned positive in June after contracting for three consecutive months.

The central bank also said that liquidity in the system was in large surplus in June-July 2019 due to return of currency to the banking system, drawdown of excess cash reserve ratio (CRR) balances by banks, open market operation (OMO) purchase auctions, and RBI's foreign exchange market operations.

RBI governor Shaktikanta Das clarified that future policy actions will be dependent on upcoming data. He also said that NBFC loans to MSME sector up to Rs 20 lakh will get priority status. He also assured sufficient liquidity to all needy sectors.

It is well known that the impact of the monetary policy on the Indian economy is felt with a significant lag, but the situation at the current juncture has become further complicated due to the ongoing crisis in both the banking and the shadow banking sectors.

While banks are struggling with high NPAs, NBFCs are struggling with solvency issues leading to credit freeze.

It would be interesting to see how this all pans out. Meanwhile, we will keep you updated on all the developments from this space.

In news from the automobile sector, India's largest tractor manufacturer, Mahindra and Mahindra (M&M) reported a 26% decline in its consolidated net profit at Rs 9.2 billion for Q1FY20.

Reportedly, the fall in profit was attributed to sluggish domestic volume and increased cost pressure. The company had posted a profit of Rs 12.4 billion in the year-ago quarter.

Operational revenues for the quarter declined by 7% to Rs 260.4 billion against Rs 280.6 billion in the corresponding quarter of the previous fiscal. Operating profit margin contracted 180 bps to 14% in Q1FY20 from 15.8% in Q1FY19.

The company reported a one-time gain of Rs 13.7 billion for the quarter mainly on account of gain on sale of shares by M&M benefit trust and gain on buyback by an associate/transfer of certain long-term investments.

The company's domestic wholesale volumes declined across vehicle categories during Q1FY20. According to data released by Society of Indian Automobile Manufacturers (Siam), M&M dispatched 59,399 units of passenger vehicles in Q1, which marked a year-on-year decline of 2%.

In the commercial vehicle segment, it reported a drop of more than 9% YoY with volumes at 51,594 units during the three-month period. For three-wheelers (excluding electric vehicles), the company reported domestic wholesales of 12,697 units, down 2.4% YoY.

M&M share price ended the day down by 6%.

To know more about the company, you can read M&M's 2018-19 annual report analysis on our website.

Note that automobile sales have fallen every month for almost a year now, except for October when the numbers were flat. In June, nine out of India's 11 main passenger vehicle makers reported a double-digit decline in sales.

Reports state that many dealers who have recently entered the auto industry are finding it difficult to manage their repayment obligations. Banking industry experts estimate the total outstanding loans to automobile dealers to be in the range of Rs 700-800 billion.

However, it is interesting to note that despite the slowdown in the auto sector, the sales volume of electric vehicles (EVs) are growing at a robust pace.

Have a look at the chart below:

Electric Vehicle Sales on a High Growth Trajectory!

Electric-2 wheelers sales volume registered 130% YoY growth in FY19. 4-wheeler EVs grew by 200% YoY.

Similarly, electric three-wheelers reported the highest sales volume of 630,000 units. It is important to note that the electric three-wheeler industry has been growing without government support.

The base is quite low compared to the internal combustion engine (ICE) vehicle sales. However, you cannot ignore the growing momentum in EV sales.

The recently announced government incentives will give a further boost to EV sales. The coming one year will be a real test for India's auto companies.

It will also tell us if this slowdown is temporary or if there has been a structural change in the sector.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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