RBI spun a surprise by holding rate cuts…this at a time where every broker poll was pencilling in a 25 bps cut unanimously, also let us not forget this came on the back of a Q2 GDP number of 4.5%, a number largely in line with market expectations. RBI slashed its own GDP expectations for the year by 1.1%.
Given that the transmission of the 135 bps cut so far by Mr Das has seen very poor transmission, the weighted average lending rate declined 29 bps on fresh rupee loans from February to August this year and although since then it has improved further, it seems that they thought it better to hold the gun powder till banks are confident enough to offer lower retail rates.
Inflation and fiscal deficit concerns were thus put forward to delay the rate cut the commentary however stayed extremely dovish.
A Sensex PE at 27-29 range seems to suggest that we are pricing in earnings which haven’t happened yet, earnings have grown in single digits in Q2 and it seems unlikely that Q 3 will see a big improvement. Also if you move outside the top 10-15 stocks the picture changes considerably. Mid caps and small caps have been largely shunned by all pockets of the market and are trading at prices much lower than the levels they were at before long term capital gains tax was introduced.
Also the ‘accidents’ – be it defaults or rising NPAs for banks and other NFC’s, etc has meant that the feel good factor has largely been missing, the market has become a news driven, trading market, removed from earnings and fundamentals and that to my mind is a worrying situation.