10:00AM New York, 7:30PM Mumbai – Stocks in Mumbai trading fell after the RBI left rates and reserve ratios unchanged. RBI issued an upbeat assessment of the economy.

Market Sentiment

Stocks in Mumbai trading fell after the Reserve Bank of India left the key rate unchanged. Property, banks, and auto stocks fell.

The RBI announced its quarterly monetary policy review statement on Tuesday and kept the repo rate, reverse repo rate, bank rate and cash reserve ratio unchanged.

Market analysts had projected a 25 basis points repo rate cut by the central bank after a sharp cut in the US interest rates last week.

The late recovery on the market was not enough to lift the market from the afternoon loses. The key benchmark, Sensex fell below 18,000 during the afternoon trade.

The 30-share BSE Sensex declined 0.34% or 60.84 at 18,091.94. The S&P CNX Nifty slid 16.5% or 1,076.30.

Shares from banking, auto and real estate sector declined but software stocks advanced.

Of the BSE shares, 1,394 shares fell 1,348 that advanced and 53 shares remained unchanged. Among the Sensex shares, 17 stocks advanced while the rest slumped.

Turnover on BSE was 4,781 crore rupees while turnover on the National Stock Exchange was at 12,082 crore rupees.

Reliance group stocks were the most active shares on the BSE. Reliance Natural Resources had the highest turnover of 293 rupees followed by Essar Oil, Reliance Energy, Reliance Petroleum and Reliance Industries.

RBI Statement

The Reserve Bank of India left the bank rate and reverse repo rates unchanged at 6.0% and repo rate unchanged at 7.75%. The cash reserve ratio was left unchanged at 7.5%.

The RBI said that the recent uncertainty in the global credit markets were not ‘entirely unanticipated’.

The statement further stated that turmoil “intensity appears to be severe and the duration uncertain. It appears that a process of reordering of global economic balances is underway and hence, the process is likely to continue to be complex with significant implications for trade flows, financial flows, asset prices and balance sheets. In terms of the impact of such a process on India, our external trade is, relative to many other EMEs, well diversified.
Similarly, on a systemic basis, most parts of the balance sheets of both the public sector and the private sector are relatively less exposed to foreign currencies. However, more recently, several large corporations have expanded their foreign currency exposures which have to be managed carefully. The major source of impact is through the financial flows, in particular, in the equity markets and, consequently, on the foreign exchange market in India. The second order effects on account of financial contagion or real sector developments are somewhat indeterminate at this stage.”

The Bank added that the money supply has been growing rapidly and is above the target of 17% and 17.5% but below the estimate in the mid-term review of 24% to 25%.

The Bank also cited that headline inflation has picked up since the beginning of December 2007 and it is the banks’ policy to target the inflation close to 5% and in the medium term at 3%.

The bank assessed that the economic growth and health of the economy for the fourth quarter to be in line of its expectations.

The Bank added, “On balance, the prospects for the domestic economy over the remaining part of 2007-08 are consistent with policy expectations. First, there has been a modest deceleration in output growth in the second and third quarters. Second, aggregate supply conditions have continued to expand in all constituent sectors and the ongoing investment boom should entrench the improvement in supply elasticities, going forward.

Third, corporate profitability and business confidence continue to be sustained by the underlying macroeconomic fundamentals, positive sentiment in financial markets and resilient export demand, especially in view of the global economic and financial environment.