Subbarao fires up markets

Banking, realty lead 491-point Sensex rally as Governor-speak reinforces rate cut bets

Indian stocks today rose to close at their highest level since January 2011 on hopes of a steeper policy rate cut next month, after Reserve Bank of India Governor D Subbarao said he had taken note of the decline in inflation, reinforcing future rate cut bets.

Speculation that India’s weight on the MSCI emerging markets index could increase, leading to further foreign institutional inflows, also lifted sentiment. MSCI is likely to announce changes to its indices later tonight.

Shares of banks, property developers and auto makers led the rally, as these sectors are considered the biggest beneficiaries of interest rate falls. Subbarao’s statement has come a day after the government said the rate of wholesale inflation had stood at 4.89 per cent in April, the lowest since November 2009, sparking a rally in stocks and government bonds today.

BSE’s Sensex rose 490.67 points, or 2.49 per cent, to close at 20,212.96 — its biggest percentage gain in a day since June 2012. NSE’s Nifty rose 151.35 points, or 2.52 per cent, to close at 6,146.75.

“The current market rally has been driven by underperforming sectors, indicating the market expects economic recovery soon. This will be aided by RBI’s rate cuts and the solving of the myriad policy-related issues,” said K Ramanathan, chief investment officer, ING Investment Management.

BSE’s realty and bank indices rose four per cent each today. The auto index gained 2.3 per cent.

Today’s gains erased the losses the benchmark indices had seen on Monday, after the widening trade deficit data raised concerns over the government’s ability to control the current account deficit and inflation.

“The good news is that inflation has come down but there is still some concern on the current account deficit side,” said Rashesh Shah, chairman and CEO, Edelweiss Financial Services.

Foreign institutional investors extended share purchases, pumping close to Rs 1,650 crore into Indian equities today. Their domestic peers net-sold to the tune of Rs 747.12 crore. Since January, FIIs have net-bought to the tune of Rs 68,000 crore, or $12.6 billion, after pouring about $25 billion in 2012.

“FIIs will continue to pump in money as global liquidity flows continue,” said Ramanathan. “It may come down a bit to the extent that the US Federal Reserve has said it might slowly wind down its bond-buyback programme. But, it won’t be a knee-jerk reaction,” he said.

Gains in stocks this month have also been aided by a global market rally, sparked by easier monetary policy that has led to a surge in foreign investments in domestic markets.

Foreign investors had been net-buyers of stocks for 19 straight sessions as of yesterday, regulatory data showed, bringing their total for the year to $12.90 billion.

A recent Wall Street Journal report said the US Federal Reserve came out with a strategy to roll back its huge monetary-easing policy.

Fund managers warn the pain could be far from over for the market, despite better economic data.

“Continued global liquidity and downward inflationary pressure are helping the positive momentum in the market, but this will be capped by political uncertainty,” said Amish Munshi, senior fund manager, Tata Asset Management.