Let us analyse BankNifty on 7th Dec 2016. Ahead of the RBI policy meeting to be held in the afternoon for a rate cut at 2.30 pm, the market traded cautiously within a very small range. Although it opened gap up but progressively headed higher.
However, in the afternoon when no rate cut was announced by the RBI, the market headed downward all at once within seconds and made a low below 18,000 as can be seen in the charts. The market had expected at least a repo rate cut of 0.25 % due to low inflation and effects of demonetization. Some analysts had even expected of a repo rate cut of 0.50%.
However, no rate cut was a disappointment for the market. Even the overall statement of the RBI gave a hawkish tone to the market. The RBI also lowered India’s GVA projection from 7.6% to 7.1% due to demonetization effect. The only positive thing in the meeting was that the decision of RBI to remove the 100% CRR on excess deposits of banks from 10th Dec. This was the only reason for the bank nifty to recover some 300 points after such a drastic fall.
The removal of CRR will provide liquidity to the bank which in a way counterbalanced the no rate cut. Also, the clarification by the RBI that there was no question of windfall gain due to demonetization of the currency acted as a mood spoiler. Overall, the sentiment of the market turned negative after such a shock.
For those who are not aware of Repo Rate or Repurchase rate, it is the interest rate at which RBI lends money to the bank. If the repo rate is decreased, it means that banks can borrow money from the RBI at a cheaper rate and hence this is considered good for the bank and the market. However, to make lending expensive, the RBI increases the repo rate. It is a short term rate.
CRR or Cash Reserve Ratio is the proportion of the cash deposits that the bank have to keep with the RBI. The higher the percentage of the CRR, the less money bank can keep with themselves for lending purpose. So, this percentage of money is intact with RBI as a safeguard for the depositors. CRR is one of the tools used by RBI to control the liquidity in the system.
100% CRR meant that bank could not use any percentage of the excess amount deposited after 8th November (demonetization period) for lending purpose. It was done to drain out excess liquidity from the banking system.
What caused the market down?
- No repo rate cut by RBI
- Hawkish tone of the RBI
- No windfall gain of the govt/RBI on the demonetized currency
For the day, Bank Nifty formed a bearish candle.
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