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The BSE Sensex surged 2.5% on Wednesday to post its biggest single-day rise in almost 18 months on growing optimism that the Reserve Bank of India (RBI) will slash key rates in the upcoming policy review in June. The hope stems from the Wholesale Price Index (WPI) inflation for April 2013 that showed a drop for the third straight month to 4.89%, data showed Tuesday.
The 30-share Sensex ended at 20,213 levels, up 491 points or 2.5% and the 50-share Nifty ended at 6,147 up by 151 points or 2.5% – their highest level since January 6, 2011. Gains were led by banks, automobiles and property developers on expectation that the central bank may cut interest rates when it reviews the monetary policy on June 17, 2013. Investor wealth soared by Rs 128,786 crore to Rs 6,852,232 crore, data showed.
Earlier, in December 21, 2011, the benchmark Sensex had rallied 510 points on the back of short covering after the index tanked 1,702 points in earlier nine trading sessions.
INFLATION
Data released on Tuesday showed wholesale price inflation slowed sharply to a 41-month low in April. This coupled with a steep fall in gold and crude oil prices, may allow the central bank to cut the policy rate next month.
“The markets have been moving up due to the FII (foreign institutional investor) flows and an overall change in perception that the economy seems to be bottoming out with the likelyhood of interest rate reduction, which in turn, should drive growth as inflation is now coming under control. The current market levels are 35% cheaper than five years ago on valuation terms, said Sandesh Kirkire, CEO, Kotak Mutual Fund.
Adds Ajay Bodke, Head - Investment Strategy & Advisory, Prabhudas Lilladher: “The markets have been volatile since the past few sessions on the back of economic and political concerns. What has calmed the nerves are the better-than-expectated WPI numbers. However, the RBI in its policy May 03 review had already stated that it expects the inflation to trend down in H1FY14 due to past policy action and a dip in commodity prices.”
TRENDING HIGHER
Rate sensitive sectors like realty and Bankex surged 4% each in Wednesday’s trade, while capital goods, oil and gas, consumer durables, auto and healthcare indices gained between 2 – 3%.
Among the individual stocks, India's largest mortgage lender – Housing Development Finance Corporation (HDFC), HDFC Bank, Kotak Mahindra Bank, IndusInd Bank, Mahindra and Mahindra, Maruti Suzuki India and Lupin from the benchmark indices hit record high levels.
The WPI data has also cooled-off bond yields today to around 7.42% as compared to March-end level of 7.96%. This, according to analysts, will breathe life into the public sector (PSU) banks in particular, which has already seen mixed results as the problems of bad loans still continues to weigh.
THE ROAD AHEAD
Kirkire of Kotak expects the inflation to range between 5 – 5.5% at the end of FY14. “The repo rates can come down by at least 50 basis points (bps) in the next six months. Rate sensitive stocks have been a big driver of the up move and we would certainly look at investing in this space at the current levels. We also have a positive view on the domestic consumption space,” he says.
“I think the chorus for a rate cut in the June policy review has reached a crescendo today. The recent WPI data also gives more leeway to the central bank to be more aggressive in its rate cutting stance. Having said that, I must say that the reasons that lead to the fall just a couple of days ago have not disappeared, but the market today seem to be in a mood to focus on the chorus building-up for a rate cut in June,” observes Bodke of Prabhudas Lilladher.
