Markets fail to benefit from rate cuts; slow economy fear surfaces

Reserve Bank of India (RBI) Governor in his video press conference informed that the repo rate and reverse repo rate are reduced further by 40 basis points. MPC committee in its meetings held on May 20, 21 and 22 also maintained accommodative stance.

In one of the first major conferences by the central bank after Rs 20 lakh crore economic stimulus package, RBI Governor said that Monetary Policy Committee (MPC) voted 5:1 in the favour of rate cut. The repo rate (RR) and reverse repo rate (RRR) now stands at 4 per cent and 3.35 per cent, respectively.

The repo rate is the one at which RBI lends money to commercial banks and reverse repo rate is on which, RBI borrows money from the commercial banks. A cut in repo rate would mean that the banks will have to lessen the amount of interest funds to the central bank, giving them higher capital availability. While, a cut in RRR would mean that the banks will avail lesser benefits of depositing money in RBI, which would further encourage them to lend more.

RBI Governor also talked about extending the moratorium dates till August 31. The markets took this negatively, as they fear that due to this extension, the economic activity may not show a revival in near future. Extension in moratorium period would make things difficult to access balance sheet position, probable bad debt levels and even credit increase for the investors.

In addition to this, the data points on the overall economic performance by Governor were largely negative. He added that the global economy is heading towards a recession and the value of global trade contracted to three per cent in Q1CY20. He also mentioned that the GDP growth in 2021 is likely to remain in negative.

Reacting to this development, Bank Nifty fell as much as three per cent intraday. Banking stocks such as SBI, Bank of Baroda and PNB fell in tune to one per cent intraday. At 11.00 am on Friday, Bank Nifty is trading at 17,173, down by 3.17 per cent.