India's financial markets cheered an unscheduled interest rate cut by the Reserve Bank of India (RBI) on...
India’s financial markets cheered an unscheduled interest rate cut by the Reserve Bank of India (RBI) on Thursday, with benchmark indices posting their biggest single day gain in eight months and bond yields falling to their lowest since July 2013. The rupee rose to a one-month high against the dollar on Thursday.
Overseas investors accounted for bulk of the buying. Provisional data from stock exchanges reflected share purchases worth $280 million (R1,738 crore) by foreign portfolio investors (FPIs) in the cash segment. Domestic institutions sold shares to the tune of R527.27 crore ($85 million).
Adrian Mowat, chief Asian & emerging equity strategist of JPMorgan was more surprised by the timing of rate cut than the direction of RBI policy decision. In a television interview, Mowat said that the rate cut sends a powerful message that India is moving towards a pro-growth monetary policy.
“This is a good wake up call for those who have been focusing on how India will fare if the Fed raises rates this year and have been under-appreciating how the dynamics in India are independent of what is going on globally,” he said.
RBI governor Raghuram Rajan cut the key policy rate by 25 basis points to 7.75%, and signalled it could do more, after data this week showed consumer prices held below the RBI’s target for a third month amid a rout in oil prices. Thursday’s “unexpected” cut was the first reduction since May 2013.
The Sensex surged 2.7% to 28075.55, the biggest gain since May and the second-best performing market in Asia after China. The 30-share gauge rose nearly 500 points in pre-open. The Nifty settled at 8494.15, up 216.60 points or 2.62% from Wednesday’s close.
The yield on sovereign bonds due July 2024 slumped eight basis points, or 0.08 percentage point, the most since December 2, to 7.69%. The rupee touched 61.4850 per dollar, the strongest level since November 13 last year, before closing at 62.0675.
Market breadth was positive with all sectoral indices closing positive and 28 out of 30 Sensex companies in the green. Overall, 1720 stocks gained as against 1174 stock that ended negative from their previous close, exchange data showed.
Interest rate sensitives lead Street from the front after early rate cut
Interest rate sensitive stocks led the market rally on Thursday after the Reserve Bank of India surprised the Street by reducing the benchmark interest rate by 25 basis points ahead of its scheduled monetary policy meet in early February.
Banking and realty stocks caught investors’ fancy after the central bank unexpectedly reduced the repo rate to 7.75% and hinted at further reduction amidst signs of tapering inflation. The realty, auto and banking space led the 600-point rally with the BSE Bankex and CNX Bank Nifty scaling record highs of 2,2023.3 and 19,235.65 after clocking in gains of about 3.3%. BSE Realty index emerged as the best performing sectoral index as it rallied 119.25 or 8% to 1611.43 while the auto index added 402.26 or 2.1% and closed at 19306.90, within touching distance of its record high.
Experts say, amid hopes of another 50-75 bps of rate cut to come through 2015, the token rate cut raised buying action in interest rate sensitive stocks on hopes of improved earnings potential.
“Indian markets were languishing for the past few sessions due to lack of triggers. This is a good enough trigger for markets to cheer,”said Kamlesh Rao, CEO of Kotak Securities.
He added that while sectorally, banks, auto and other interest-rate sensitive sectors will observe good momentum, several debt-heavy companies in sectors like infrastructure and capital goods will be in focus.
In the BSE 200 universe, real estate players like HDIL, DLF, Indiabulls Real Estate and Unitech led the list of outperformers having rallied 8-19%. While as many as seven Bankex constituents ended the day up more than 3% , SBI (up 5.5%), ICICI Bank (4.9%) and Canara Bank (4.3%) were the prominent gainers.
According to Gautam Chhaochharia, head of India research at UBS, even with mild recovery, lower interest rates will be a big positive for the banking sector through lower NPLs ( non-performing loans) and higher bond-book or treasury gains. While property stocks may witness higher momentum, the fillip in lower interest rate environment could be introduction of REITs ( real estate investment trust).
“100 bps lower rates could lower stressed assets by 20%, as per a scenario analysis we ran,”added Chhaochharia.
Stocks of highly leveraged, infra and power players, including Reliance Infra, GMR Infra, GVK Power, Jaiprakash Power Ventures, , Lanco Infra and IVRCL all rallied 5-10% as traders factored in impact of the interest cut on their stressed balance sheet. Other than Reliance Infra, each of these companies maintain net debt to EBITDA ratio of over 14 times, reflecting stress on their profitability. Reliance Infra’s net debt to EBITDA currently stands at 7.2 times.