Markets blast off as trade winds, Syria relief add to Rajan Effect

Written by fe Bureau | Mumbai | Updated: Sep 11 2013, 08:43am hrs
The party continues. Less than a week into his stint as the governor of the Reserve Bank of India (RBI), Raghuram Rajan seems to have won the confidence of the currency and equity markets. In spectacular rallies on Tuesday, the rupee closed at 63.84/$ notching up a 2.1% gain over Fridays close while the Sensex added a remarkable 727.03 points or nearly 4% to nudge the 20,000-mark. Hopes of a pick-up in foreign inflows on account of the RBIs recent measures especially cheaper swap facilities to banks and a revival of equity flows helped the rupee rebound by over 7% from its all-time low of 68.85/$.

A fall in the trade deficit for August to a five-month low of $10.9 billion, from $12.2 billion in July, also aided sentiment in the currency and equity markets. Stocks posted their biggest single-day gain in four-and-a-half years as traders shed some of their pessimism over the depreciating rupee, trade deficit and the possibility of a conflict in Syria. Foreign institutional investors (FIIs) were back in business buying $400 million of Indian equities on Tuesday, according to provisional data, taking their month-to-date tally to nearly $700 million. In August, FIIs had sold stocks worth close to $2 billion in July and August.

The Sensex has now added 1,762 points or 9.6% in four trading sessions while the 50-share Nifty has gained 555 points or 10.3%.

Rajan, on his first day as RBI governor, announced special swap facilities that would reduce the currency risk that banks take on their foreign currency deposits and overseas borrowings. Analysts estimate the swap would bring in more than $10 billion through FCNR deposits.

The rupee had overshot its true levels; so, this is a healthy correction. Various factors are at play here, including RBIs taking away the oil demand, Syrian worries cooling down and stable or falling crude oil prices, said Ananth Narayan G, head, global markets at Standard Chartered Bank.

Narayan believes the prospects of fresh flows coming into India by way of FCNR(B) and bank money is improving sentiment. While uncertainties including elections and the possibility of a downgrade remain, I dont think we will see a repetition of the rapid depreciation of the rupee that we saw from May onwards, he added.

Indian equities also benefitted from the rally in Asian and European markets on the back of a stronger-than-expected Chinese industrial production data for August. Major Asian indices like Nikkei, Hang Seng, and Kospi gained over1%. Major European indices like FTSE, CAC, and DAX were trading up 1.2-1.5% when trading in Indian equities ended. Chinas industrial output rose 10.4% y-o-y as against analysts expectations of up to 9.5% increase indicated the worlds second-largest economy may be on the mend.

The Sensex gained 707.56 points or 3.7% the highest since May 18, 2009 to close at 19,977.62. The gauge of top 30 stocks briefly touched its crucial psychological mark of 20,000 towards the end of Tuesdays session. The Nifty surged 3.9% or 22.7 points to close at 5,903.10 led by sizable gains in frontline stocks. Experts pointed out, however, the rally suggested buying activity remains restricted to top 50-100 stocks and added that policymarkers need to bring in reforms to boost all-round economic growth and ensure investment optimism stays intact.

Andrew Holland, CEO, Ambit Investment Advisory said: Investors are running out of patience. It cannot be just talk, talk and talk. Policymakers need to get the interest rates lower and hike fuel prices to further attract overseas investment. According to funds tracking company EPFR Global, nearly $6 billion has flown out of emerging markets bonds and equities funds during the week ending September 4. Explaining the outflow, the report said: There are fears that the US economy may face higher taxes, oil prices and interest rates in the fourth quarter of 2013 as the US Federal Reserve takes the first step to wind down its quantitative easing programme.