The Reserve Bank of India (RBI) has announced a cut in the policy interest rate. It has cut the repo rate by 25 basis points (0.25%). The result is that this rate now stands at 7.5%. The year 2014 was quite disappointing on this front for various sectors. The recent rate cut comes as surprise since it was the second rate cut in 2015 so far.
Post the downward revision in interest rates, various groups and experts seem to have rejoiced this move. Experts are betting on various sectors like; real estate, infrastructure, banking, steel, cement and other sectors due to back to back rate cuts. There is much action expected from the banking sector; that is expected to pass on the rate cut benefit to consumers. This in turn is believed to benefit the other sectors too. The enthusiasm was obviously witnessed in the stock markets also. The rate cut gave boost to equities across various sectors. The benchmark indices neared 30k levels for the first time ever, before the markets gave up gains during the latter trading hours.
However, this gusto looks quite artificial to us. We at Equitymaster would keep a caution here, and would never promote idea of buying the stocks based simply on the fact that repo rate has been cut by a few basis points.
And our reasons are rooted in our belief of long term investing philosophy of picking stocks at reasonable valuations. Our stock selection philosophy is largely based on value investing. The value investing is all about, trying to assess the intrinsic value of a stock and then buying the stock only if there's a good gap between price and value.
Events like repo rate cut may lift the stock price in the short term; however, there is no addition to the stock's intrinsic value which is based solely on fundamentals. The point that we are trying to drive across is that one should be very careful, and not get carried away by such noises. Rather, it would be worthwhile to focus on finding the undervalued stocks with strong moats and good management.