Sensex Slumps 800 Points As RBI Holds Rates

After opening the day in the red, share markets in India witnessed volatile trading activity throughout the day and ended the day deep in negative territory. Sectoral indices ended the day in red, with stocks in the energy sector and stocks in the PSU sector losing the most.

At the closing bell, the BSE Sensex stood lower by 792 points (down 2.3%) and the NSE Nifty closed down by 283 points (down 2.7%). The BSE Mid Cap index ended the day down 2.7%, while the BSE Small Cap index ended the day up by 2%.

Asian stock markets finished mixed. As of the most recent closing prices, the Hang Seng was down by 0.2% and the Shanghai Composite was up by 1.1%. The Nikkei 225 was down by 0.85. Meanwhile, European markets too were trading on a negative note. The FTSE 100 was down by 0.6%, The DAX, was down by 0.8% while the CAC 40 was down by 0.5%.

The rupee was trading at Rs 74.08 against the US$ in the afternoon session. Oil prices were trading at US$ 84.88 at the time of writing.

The Reserve Bank of India's (RBI) monetary policy statement is one of the most tracked events in the financial world. With a weakening Rupee and both core and retail inflation heading upwards, a rate hike in key interest rates was widely expected. However, the RBI surprised market participants as it held key interest rates.

The monetary policy committee (MPC) of the Reserve Bank kept the repo rate unchanged at to 6.5% in its fourth bi-monthly monetary policy review of 2018-19.

Repurchase rate, or repo, is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds.

Consequently, the reverse repo -- the rate at which the RBI borrows money from commercial banks within the country -- stood unchanged at 6.25%. The MPC changed the stance to calibrated tightening. In its August policy meet, the rate-setting panel headed by Governor Urjit Patel raised repo rate by 25 basis points to 6.25%.

The chart below shows how India's inflation and policy rates stand in comparison with other Asian economies.

India's Policy Rates Compared to Asian Economies

The central bank had hiked interest rate by 25 basis points each in June and August citing upward pressure on inflation and volatility in crude oil prices.

The anticipation of a rate hike had increased in the past month as oil prices climbed, the rupee's slide accelerated and concerns on liquidity emerged.

The RBI retained GDP growth estimate at 7.4% for fiscal year ending in March 2019..

The central bank's goal is to keep headline inflation close to 4% over the medium term.

Moving on to news from stocks in the pharma sector. Sun Pharma share price was in focus today after it was reported that the US Food and Drug Administration (USFDA) has reclassified the company's Halol unit as 'no action initiated'.

According to the USFDA, 'no action initiated' would mean that the facility has been cleared.

Back in September the USFDA had issued six observations in form 483 for Sun Pharma's Halol unit in Gujarat.

While the company did not clarify on the observations, it was reported that the observations include aspects such as lack of appropriate test measures for lab controls along with some procedural issues too.

Sun Pharma share price ended the day down by 0.2%.

Indian pharma companies catering to the US markets are breathing a sigh of relief. After being adversely affected by import bans and the suspension of new drug approvals from manufacturing facilities in the past three years, there has been a sharp pick-up in new drug approvals in FY17.

However, note that USFDA alerts on Indian pharma companies have increased over the past few years. Regulators used to visit the plants every two years. Now they come every eight months. Increasing inspections have led to a total of 41 import alerts in the past eight years - 33 of them (80%) in just the last four years (2013-16). This clearly signifies increased USFDA scrutiny on Indian pharma firms. If that wasn't enough, increasing pricing pressure in the generics segment has dented realizations.

However, the recent development of USFDA expediting the drug approval process can bring some respite for Indian pharma companies. This comes as drug approvals for Indian companies have gone up 50% in the period from January to June 2017 compared to the same period last year.