Rate cut hope drives Sensex to 3-month high

Indices jump 1.3% each, extend monthly advance to 9.1%

Indian markets on Monday posted their biggest single-day gain in about two weeks, led by banking and realty stocks on expectations that the Reserve Bank of India (RBI) would reduce borrowing rates after the government cut rates on small savings schemes.

The BSE Sensex rose 1.3  per cent, or 332.6 points, to 25,285.4, the highest since January 6. The Nifty 50 index ended at 7,704, up 100 points, or 1.3 per cent. Foreign institutional investors (FIIs) bought shares worth around Rs 1,400 crore, while domestic investors’ net-sold shares worth around Rs 619 crore, provisional data provided by stock exchanges showed.

The bond market cheered the cut in small savings rates, driving down the 10-year bond yields to a 32-month low at 7.47 per cent, down five basis points compared to the previous close of 7.52 per cent. However, profit-booking ensured the yields closed at 7.5 per cent. Bond traders expect yields to fall further in the run-up to the monetary policy review on April 5. The rupee ended at 66.53 against the dollar, compared to the previous close of 66.5.

On Friday, the government cut interest rates on public provident fund and senior citizen deposits.

“This (small savings rate cut) is a significant policy reform, which will pave the way for a market-linked interest rate structure and enable faster monetary transmission…The central bank may look to slash the cash reserve ratio (CRR) as well, in addition to a cut in the repo rate,” said Abhay Laijawala, managing director and head of research, Deutsche Bank India.

Rate-cut hopes sparked a rally in banking stocks, with the State Bank of India rallying three per cent to a two-month high and Prestige Estates soaring 10 per cent.

The Sensex gained over nine per cent this month and is on course to post its biggest monthly advance since January 2012. The climb has coincided with the Budget announcement on February 29 that the government would stick to the fiscal deficit target and take steps to boost rural demand. Most global markets too have gained this month following steps taken by global central banks to support growth.

The Bank of America Merrill Lynch Market Risk index, which tracks volatility expectations for equities, bonds, currencies and commodities, fell to (minus) 0.24 on Friday, the least since January 6, says Bloomberg.

A low reading on the index indicates investors are less fearful, explaining the gush of inflows into emerging markets, including India.

FIIs have pumped in about Rs 16,000 crore (around $2.3 billion) into Indian stocks this month. The inflows have seen Indian markets gain nearly 13 per cent from the lows of February 29.

The Sensex now trades at 15.5 times its one-year forward month projected earnings compared to 11.6 times the MSCI Emerging Markets Index, which is nearing bull market territory after having jumped nearly 20 per cent this month.