Sensex slams double century on RBI’s surprise 50 bps rate cut, European cues

After snapping last trading session on a cautious note, Indian benchmark equity indices finally showed some enthusiasm as market bulls eagerly waited for some significant upside triggers to cover the huge pile of short positions that got build up in the past week. The frontline indices surged on large volumes amid heightened volatility as gains on the European stock markets underpinned domestic sentiments and invigorated the key gauges which had succumbed to profit booking at higher levels.

The stock markets showed a kneejerk reaction to the higher than expected rate cut by Indian central bank as the benchmarks spurted around the psychological 17,350 (Sensex) and 5,300 (Nifty) levels within seconds. This was RBI’s first interest rate reduction in three years and the move is likely to spur growth that has slowed markedly due to relentless monetary tightening.

However, the key gauges could not sustain the gains and pared most of them since market participants grew concerned over the language of RBI, which suggested that there may be no more rate cuts, causing a bit of disappointment. The rate cut has come in the backdrop of lower than expected growth in industrial production and slight moderation in March WPI inflation, however concerns remained that the inflationary pressure would reignite due to volatile international crude oil prices and the depreciating Indian rupee.

But the last leg of trade saw the local markets rally to day’s high on the back of supportive cues from European markets and the benchmark’s northbound journey only halted with the session’s close. Investors piled up hefty positions in the interest rate sensitive Realty counter, which surged by about two and half a percent and topped the BSE sectoral space.

While the Metal and PSU pockets too gained traction and settled with around two percent gains. The ADA Group stocks made their presence felt in the session as stocks like Reliance Infra, Reliance Communications and Reliance Power rallied in the range of 3-6% in the session. Though there remained no sectoral laggards, however some index heavyweights like M&M, RIL and Maruti failed to keep their heads above the water.

On the global front, cues from Asia remained unsupportive as markets in the region settled in the negative terrain as market sentiments got undermined after data showed that foreign direct investment in world’s second largest Chinese economy continued to decline.

The European markets after starting the session on a flat note, capitalized on the momentum and soared over a percent after reports of successful Spanish Treasury debt auction and data showing improvement in Germany's economic sentiment for the fifth straight month in April.

Back home, the NSE’s 50-share broadly followed index Nifty, jumped around one and a quarter percent to settle just below the psychological 5,300 support level while Bombay Stock Exchange’s Sensitive Index - Sensex slammed a double century to finish just above the crucial 17,350 mark. Moreover, the broader markets too caught up with the optimism and settled with over half a percent gains, underperforming their larger peers.

The markets surged on strong volumes of over Rs 2.02 lakh crore while the turnover for NSE F&O segment remained on the higher side as compared to that on Monday at over Rs 1.73 lakh crore. The market breadth turned optimistic by the end as there were 1,661 shares on the gaining side against 1,164 shares on the losing side while 121 shares remained unchanged.

Finally, the BSE Sensex jumped 206.99 points or 1.21% to settle at 17,357.94, while the S&P CNX Nifty climbed by 63.50 points or 1.22% to close at 5,289.70.

The BSE Sensex touched a high and a low of 17,381.92 and 17,103.36 respectively. The BSE Mid cap and Small cap index were up by 0.72% and 0.63% respectively.

The major gainers on the Sensex were ONGC up by 3.62%, Coal India up by 3.18%, Hindalco Industries up by 3.06%, DLF up by 2.76%, and Hero MotoCorp up by 2.71% while Mahindra & Mahindra down by 0.47%, RIL down by 0.25% and Maruti Suzuki down by 0.03% were the major losers on the index.

The top gainers on the BSE sectoral space were Realty up by 2.41%, Metal up by 2.01%, PSU up by 1.83%, Capital Goods (CG) up by 1.67% and Power up by 1.64%, while there was no loser on the BSE sectoral space.

Meanwhile, the Reserve Bank of India (RBI) has cut the Repo rate by a substantial 50 basis points. Although a rate cut was largely expected, the quantum of it has come in as a pleasant surprise. There has been no cut in the CRR rates.

The repo rate is the rate at which banks borrow money from RBI. This is a reference rate used by banks to lend to their customers like companies and individuals. With the recent cut this rate now stands at 8%. The reverse repo rate, the rate of interest at which the central bank borrows funds from other banks for a short duration, has also been reduced by 0.50%.

The governor of the RBI, D Subarao has stated that the reason for cut is the substantial slow down in GDP growth rate to 6% levels and an even more substantial fall in the core inflation. Non food manufacturing inflation slowed down to below 5% levels for the first time in the last two years, as per government data released on Monday.

The RBI has further stated that going forward it expects GDP growth to be around 7.3% which is lesser than the government’s estimate of 7.5%. It feels that the economy will settle at its post 2008 levels of 7-7.5% in the current fiscal.

The RBI has also said that oil prices and a weak rupee pose inflationary risks, and has warned that inflation could remain sticky in the current fiscal, calling for a policy that would not exacerbate inflation. Hence going forward the monetary decisions taken by the RBI will depend on the growth levels and the trajectory taken by inflation.

Subbarao has further reiterated the role of the government in the economic growth of the country and has stated that there is limited scope for the monetary policy if the government does not do its job of containing the fiscal deficit. Further it believes that it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production. A revision in administered prices (if done by the government) may or may not pass on to the general public. But if it does then the upside risks to inflation remain.  In such a situation the monetary policy will have to be recalibrated to the existing situation.

Given the substantial cut by the RBI it is difficult to gauge whether this is a one off move or will there be any more cuts in the future. The RBI seems to say that as long as growth is below its trend of 7.5%, it shall support growth. However the timing and extent depend on the levels of inflation.

The S&P CNX Nifty touched a high and low of 5,298.20 and 5,208.35 respectively.

The top gainers on the Nifty were Reliance Infra up by 6.14%, RCOM up by 5.63%, ONGC up by 4.13%, Rpower up by 4.06% and GAIL up by 3.36%.

On the flip side, Cairn India down by 1.50%, HCL Tech down by 0.73%, Dr Reddy down by 0.59%, Kotak Bank down by 0.57%, and Reliance down by 0.22% were the top losers on the index.

The European markets were trading in green, as France's CAC 40 up 1.42%, Britain’s FTSE 100 up 0.90%, while Germany's DAX was up by 1.30%.

Renewed fears over Europe’s sovereign debt crisis continued to dampen sentiment in Asian region and most of the Asian equity indices snapped the day’s trade in the negative terrain on Tuesday. Moreover, data showing foreign direct investment in the mainland China continued to decline too weighed on the sentiments. Fears that Spain could follow Greece, Ireland and Portugal in needing a bailout sent the cost of the country’s debt above six percent for the first time since late last year. Spanish 10-year government bond yields rose above 6 percent on Monday for the first time since the beginning of December, fuelling concerns that Madrid could fail to meet deficit targets as the country acknowledged it has probably tipped into its second recession since 2009. 

Meanwhile, mainland Chinese and Hong Kong stocks edged lower in the trade after foreign direct investment (FDI) in China fell in March for the fifth consecutive month, official figures showed Tuesday, as Europe continues to struggle with its debt crisis and economic weakness. Investment from overseas fell 6.1 percent in March from a year earlier to $11.8 billion. Moreover, Seoul shares fell slightly as investors took to the sidelines to assess the euro zone’s latest debt troubles and await the results of a Spanish bond auction.