The Reserve Bank’s decision not to cut key policy rates is slightly negative for Indian equities and rupee in the near term, says a Nomura report.
“The surprising decision not to cut rates is slightly negative for Indian equities and INR in the near term; however, we maintain our medium-term view of INR outperformance and long INR position in our RV portfolio,” Nomura said in a research note.
According to Nomura, expectations for a rate cut had built up after the government had stuck to its path of fiscal consolidation in a prudent (rather than a populist) budget.
Following the Reserve Bank’s surprise decision not to cut rates there was a sharp plunge in the Sensex within minutes of the policy announcement amid a heavy pounding of bank stocks on February 8.
BSE’s Sensex ended the day 45.24 points lower at 28,289.92 on February 8, after recouping a large part of its intra-day loss of 186 points.
“While there will likely be market concerns over the absence of monetary accommodation to offset the impact of demonetisation, we do not believe these concerns will be long-lasting,” Nomura said.
According to the report, the market concerns will not be long-lasting as demonetisation is likely to have a temporary impact and the government’s fiscal policy remains supportive of growth via higher spending on rural, agriculture and infrastructure sectors.
On the rupee front, the report said the INR is set to outperform the region.
“We continue to expect INR to outperform the region due to relatively strong domestic demand-led growth, a strong BOP position, positive sovereign rating upgrade momentum, and the RBI’s significant FX reserves to manage INR volatility,” it said.
The rupee is currently hovering at 66.95 against the dollar.