Stocks rally on hopes of bigger rate cut by RBI
The government on Friday cut interest rates for term deposits offered to millions of small savers after the RBI reduced its key repo policy rate by 125 basis points last year.
That came on top of slowing inflation and weakening industrial growth besides supportive global cues that were already pointing toward a more accommodative central bank policy, experts said. The BSE Sensex rose 1.33% to close at 25,285.37 points, going past the psychologically important 25,000 mark. The Nifty 50 rose 1.31% to 7,704.25, the highest in the past 51 trading sessions.
The BSE Mid-cap and Small-cap indices gained 1.4% and 1.36%, respectively. “The expectation is obviously about 25 bps interest rate cut by RBI but the prayer is that maybe we could be surprised with a 50 bps cut,” said Nilesh Shah, managing director, Kotak Mutual Fund. The RBI’s monetary policy meet is scheduled on April 5. Foreign institutional investors (FIIs) bought heavily, having already pumped about Rs 14,000 crore into the market so far in March.
They made net purchases of stocks worth Rs 1,400 crore on Monday, according to BSE provisional numbers, while domestic institutions sold equities to the tune of Rs 619 crore. Bonds and bank shares rose after interest rates were cut for term deposits offered to small savers in line with market rates.The rate on Public Provident Fund was cut to 8.1% from 8.7%.
Analysts said the move will ensure better transmission of policy rate cuts besides prompting RBI to lower rates in its April policy review. “The slash in interest rates on small savings, coming close on the heels of the Union Budget where the government adhered to fiscal consolidation has increased market expectations of a more ‘dovish’ RBI on April 5 and for the rest of the year, when the RBI meets to discuss its monetary policy,” said Abhay Laijawala, managing director and head of research, Deutsche Bank.
“With inflation and IIP (index of industrial production) data both being supportive and the Fed staying on hold, markets have started to price in the possibility of a rate cut higher than the current expectation of 25 bps.” The benchmark bond yield on Monday dipped to 7.48%, three basis points lower than the closing level on Friday. In his February 29 Budget, finance minister Arun Jaitley pledged to stick to fiscal deficit targets.
IIP contracted 1.5% in January, while retail inflation slowed to 5.18% in February from 5.69% in January. All BSE sectoral indices ended positive on Monday with industries and capital goods gaining more than 2%. The BSE Bankex rose 1.7%, taking the cumulative gain since February 29 to 19% against a 12% rise in the Sensex since the day of the Budget announcement.
The country’s largest lender State Bank of India rallied 3% to Rs 196.65 while mortgage lender HDFC and ICICI Bank gained 2% each. Good news in the form of some action on the bank front is boosting the positive sentiment, said market experts. “We saw the government cutting rates on the savings instruments and banks will be the biggest beneficiaries as banks will also get de-posits at cheaper rates now. That is one of the factors that is positive from a markets perspective as well,” said Sandeep Nayak, CEO, Centrum Broking.
“The rally should sustain. The fear led by global factors has s ubsided and FII flows have resumed which is creating a buoyant market.” In China, state margin lender China Securities Finance Corp said it would resume some short-term lending after suspending parts of its business 18 months ago and cut brokerages’ borrowing costs. This helped several markets shrug off a retreat in oil prices on concerns over excess supply.
Cement stocks gained on the back of rising prices of the construction material. Goldman Sachs said there would be a 9% increase in demand led by increased government focus on infrastructure.