The Indian share market experienced a momentous day on October 6, 2023, with significant gains across key indices. In order to combat retail inflation, which is still above its upper tolerance range of 6% according to the most recent data amid a patchy South-West monsoon and rising oil prices. The policy repo rate will remain at 6.50 percent at the unanimous recommendation of the six-member monetary policy committee (MPC).

Share Market: A Positive Day for Indian Markets

On this day, Indian equity markets exhibited impressive resilience and an upward trajectory. The NSE Nifty 50 index recorded a substantial gain, closing at 19,653.50 points, marking a 0.55% increase. BSE sensex increased by 0.55% at the same time to 65,995.63 points.

Most experts expected the MPC to take this cautious stance.

Their upper limit for inflation is 6%. So far, in all four meetings for the fiscal year 2024, the MPC has kept the repo rate unchanged. Additionally, the MPC made a decision with the majority of 5 out of 6 members to focus on gradually reducing the economic accommodation they’ve been providing. This approach aims to bring inflation closer to the target while also supporting economic growth.

Share Market: TCS Contemplates Share Buyback

Another significant item that caught market players’ attention was Tata Consultancy Services’ (TCS) declaration.TCS revealed its intention to consider a share buyback during its forthcoming board meeting, scheduled for the following Wednesday. This announcement generated significant interest, given TCS’s substantial previous buyback in 2020, valued at ₹16,000 crore.

Share Market: Impact on Rate-Sensitive Sectors

The RBI’s decision to keep policy rates unchanged had a domino impact on numerous sectors of the economy. Financial services, real estate, and the automotive industry experienced notable gains, demonstrating their responsiveness to changes in monetary policy.

Share Market: International markets contribute to positivity.

 In addition to domestic factors, positive sentiment was further fueled by favorable trends in international markets. Both Asian and European markets displayed a bullish trend, which resonated positively with Indian investors. The global context played a crucial role in shaping market sentiment.

Notable Performances Among Listed Companies

 Several companies listed on the Sensex demonstrated exceptional performance during this period. Bajaj Finserv, a financial services conglomerate, witnessed a remarkable surge of nearly 6%. Bajaj Finance, another leading financial institution, recorded an impressive climb of nearly 4%. Titan, a renowned consumer goods company, surged by 2.98%. Other noteworthy gainers included IndusInd Bank, ITC, JSW Steel, Infosys, Tech Mahindra, Tata Consultancy Services, and Maruti. However underperformed are Hindustan Unilever, Asian Paints, Bharti Airtel, and HDFC Bank.

Share Market: A Closer Look at RBI’s Cautionary Tone

Despite the overwhelmingly positive market sentiment, it’s essential to examine the underlying factors and the RBI’s cautious tone. RBI Governor Shaktikanta Das, in his recent speech, emphasised several factors that merit consideration.

Global Crude Price Volatility

One of the significant influences on domestic inflation is the volatility in global crude oil prices. This volatility has caused anxiety, and its influence on inflation cannot be overstated. Geopolitical uncertainties and the ongoing fluctuations in global crude prices continue to pose challenges.

Geopolitical concerns persist.

Geopolitical tensions and uncertainty persist across the world. These factors have the potential to disrupt global markets and, consequently, impact India’s economic environment.

Contracting Global Trade

The contraction of global trade poses a significant challenge. As trade declines, it can affect various sectors of the Indian economy, including exports and foreign exchange reserves. The RBI is closely monitoring these trends and their potential impact on inflation.

Implications for Rate Cuts

Governor Das’s cautionary tone suggests that a rate cut should not be assumed to be on the horizon in the near future. Even though the stock market applauded the RBI’s decision to maintain the repo rate at 6.5%, it is important to understand the complexities of the bigger economic circumstances.

Nudging banks for inflation control

It is essential to explore the RBI’s method of regulating inflation if one is to better comprehend its strategy. Even though a number of factors affect inflation, the central bank actively pursues monetary policy tools to reduce it.

Role of Banks in Managing Inflation

Banks play a vital role in the overall economic framework, and their actions can significantly impact inflation. Here’s a closer look at how banks are nudged to contribute to inflation control

Open Market Operations (OMOs)

The RBI has been actively using open market operations to manage liquidity. The RBI manages the money supply by purchasing or selling government assets on the open market.

During times of inflationary pressure, the RBI may sell securities to absorb excess liquidity, thus helping control inflation.

Encouraging Interbank Call Money Market

Governor Das also advocated for banks to explore lending in the interbank call money market rather than passively parking funds in the Standing Deposit Facility (SDF). This action encourages banks to engage in active lending on the interbank market, which will encourage the movement of money throughout the financial system.

Focus on personal loans.

A notable aspect of the Monetary Policy Committee’s commentary was its emphasis on personal loans. While specific concerns regarding personal loans were not detailed, the reference to their rapid growth compared to other lending categories is significant.

Implications of Personal Loans

Credit cards and unsecured small-ticket loans are only two examples of the financial items included in personal loans.

These loans are often considered pure-consumption loans, as they do not lead to asset creation. Despite their higher risk weights, their asset quality tends to be lower than that of secured loans.

 Banks Urged to Reconsider

In light of these observations, the RBI urged banks to reevaluate their approach to personal loans and consider the associated risks. The central bank’s proactive approach demonstrates a dedication to safeguarding the sustainability and stability of the financial industry.

Withdrawing Cash Reserve Ratio

One notable development was the withdrawal of the incremental cash reserve ratio (CRR) from the banking system. This decision, coupled with the upcoming festival season, underscores the RBI’s preference for open market operations (OMOs) as a tool for liquidity management.

Encouraging Efficient Fund Utilisation

Governor Das’s statement also encourages banks to explore lending opportunities in the interbank call money market. This is a strategic move to prevent banks from passively holding funds in the SDF, prompting them to actively seek lending opportunities.

Long-Term Forex Flows and Inflation Control

The control of foreign exchange rates and flows is essential to India’s economic stability. As we examine the relationship between forex flows and inflation control, we gain insights into the broader economic landscape.

The Need to Widen the Gap

The difference between the base rates in India and the US has gradually closed in recent years. It has consequences for long-term currency flows into India because this gap is closing. An environment with more enticing interest rates is necessary to draw in sustained foreign direct investment (FDI), a more reliable type of investment.

Tinkering with Rates

To create an environment conducive to FDI, India needs to consider adjusting interest rates while keeping inflation in check. The RBI’s focus on inflation control is not just about immediate economic stability but also about creating conditions for sustained growth and investment.

Share Market: The Importance of Inflation Control

In conclusion, the recent changes in Indian markets, influenced by business announcements, global trends, and the RBI’s monetary policy choices, show how the economic environment is dynamic and changing.

While the stock market may respond positively to certain stimuli, it’s crucial to recognise the nuances and complexities that underpin the RBI’s cautious approach.

We must stay alert and flexible as we navigate the route to obtaining the coveted 4% inflation target. The economic climate is always shifting. The RBI’s proactive measures and guidance for banks underscore the importance of responsible financial practices in contributing to economic stability.

In summary, the intersection of monetary policy, inflation control, and market dynamics represents a critical aspect of India’s economic journey. Striking a balance between economic objectives and inflationary worries is crucial as institutions, investors, and politicians all work towards a secure and prosperous future.

Disclaimer: The information in this “Stock Profile” blog post is for informational purposes only. It is not financial advice. Always consult a qualified expert before making investment decisions.