Mint Road lights up Dalal Street

Benchmark indices post biggest gains in 8 months; Sensex zooms 730 points; markets wait for supporting moves in the Union Budget

Stocks gained the most in eight months after the Reserve Bank of India (RBI) unexpectedly cut its policy rate by 25 basis points (bps) in a bid to boost economic growth. The early-morning announcement caught investors by surprise. They rushed to buy rate-sensitive bank and realty stocks, resulting in a 'gap-up' opening of nearly 500 points in the benchmark Sensex.

The 30-share index closed at 28,075.55, up 728.73 points or 2.7 per cent, the most since May 9, 2014, when stocks had rallied in anticipation of a victory for the Narendra Modi-led Bharatiya Janata Party in the general elections. The National Stock Exchange's Nifty benchmark gained 216.6 points or 2.6 per cent, to close at 8,494.15.

In intra-day trade, the Sensex had gained as much as 847 points but it gave up some gains due to volatility in global markets.

"The RBI move was a big positive surprise. The long-awaited reversal in monetary policy stance will help the financial, real estate and infrastructure space. The next big trigger is the Union Budget. Investors are eyeing bold reforms and initiatives from the government," said Motilal Oswal, chairman, Motilal Oswal Financial Services.

Banking stocks led the charge, with the BSE Bankex gaining as much as 4.5 per cent on hope that the rate easing would boost earnings. State Bank of India gained five per cent, ICICI Bank ended 4.6 per cent higher and HDFC Bank added three per cent.

Lower rates will boost the demand for loans and a rally in the bond market will lead to treasury gains for banks, said analysts. Realty stocks were the other big beneficiaries of RBI's interest rate easing. DLF, the biggest realty company, gained 10.4 per cent, Unitech rose eight per cent and HDIL jumped 19 per cent.

"The rate cut wasn't surprising, given the global commodity price fall and disinflationary pressures. One can expect a further rate cut after the Budget. The infrastructure space looks very promising from a long-term perspective," said S Naren, chief investment officer, ICICI Prudential AMC.

Foreign institutional investors, which had turned cautious towards Indian equities, bought shares worth Rs 1,700 crore on Thursday. After pumping $16 billion in the Indian stock market, foreign investors have sold $300 million so far this month. "The cut is a turning point for the markets and it is going to be a mood booster. Foreign funds can increase their asset allocation for India, considering the positive development," said Nirmal Jain, chairman and founder, IIFL.

A sharp drop in crude oil prices is expected to have a positive impact on the current account deficit and inflation. The market is hoping the Modi government will be able to rein in the fiscal deficit. Improvement in the economy, coupled with the government's push for reforms, are believed to be the key factors that will help the Indian market stand out.

RBI has said further rate cuts will depend on the government's ability to control the fiscal deficit.

Brokerages Morgan Stanley and Edelweiss expect another 100 to 125 bps of rate easing this year. "Since there is little incoming data between now and the next policy (review), we perceive today's move as an advancement of the February policy action. To that extent, the probability of another rate cut in February is low…there is a scope of more than 100 bps easing in the coming year," said Vikas Khemani, president and chief executive, Edelweiss Securities.