Bearish trend likely to stay as RBI may not cut rates

What a welcome the investors had to financial year 2007-08. The market started on a bad note with the second largest fall in the history of BSE Sensex of 617 points. This is the third time in the past 19 years that the Sensex closed with a loss on the opening day of a financial year. What happened today in the market was well anticipated, as the market did not get the time on Friday to react to RBI’s announcement of increase in CRR and Repo rate by 50 and 25 basis points respectively.

The fall is a clear reaction to RBI’s blunt policy of demand dampening. It seems likely that this market is here to stay. Says, Anup Maheshwari, head (equities and corporate strategies), DSP Merrill Lynch Mutual Fund: “We have been in a rising interest rate scenario over the past two months and now we are at peak levels. If we continue to stay at this level for a period of three to four months it will affect corporate earnings and valuations which are negative for the market.”

The Sensex saw the second biggest fall in terms of raw numbers (617 points), the largest being the 826 point fall on May 18, 2006. Though it is the second biggest fall in terms of numbers till date, it is definitely not in the league of biggest falls in percentage terms. At 4.72 per cent, this crash ranks way down, at 48, in percentage terms; the biggest percentage fall came on April 28, 1992, when the Sensex fell by 12.77 per cent or 570 points.

What seems as an unusual reason for this fall is not all that unusual, says Rajiv Kumar, director, ICRIER. “When we fall short of supply, inflation rises, interest rates follow and rupee depreciates, giving way to the market turning bearish in a view of dampening demand.” It seems a bearish market is here to stay with uncertainty regarding inflation and interest rates prevailing, adds Kumar.