The bulls expect Diwali fireworks to continue on Dalal Street next week, enthused by steps taken by the Reserve Bank of India (RBI) this weekend to infuse fresh liquidity into the system.
Expectations of further steps from the government after the prime minister’s meeting with industry captains on Monday are likely to boost the market sentiment.
The BSE Sensex, the market benchmark, has gained by more than 1,250 points in the past three consecutive sessions, beginning with the one-hour muhurat trade on the day of Diwali last week.
The three-day rally wiped off more than half of the loss suffered by the Sensex in the preceding four trading sessions, when the index had lost more than 2,000 points and had also slipped below the psychological 10,000-point mark.
Expecting that RBI’s latest step to infuse an estimated Rs 85,000 crore into the system through short-term lending and mandatory rates as well as the statutory cash requirements for the banks would boost investors’ confidence, analysts believe that the 10,000 level could be regained next week.
Call may drop to 6%
Liquidity in the banking system is expected to ease following the Reserve Bank of India’s (RBI) decision to cut the Cash Reserve Ratio (CRR), repo rate and Statutory Liquidity Ratio (SLR), along with a range of other monetary measures.
The call money rate is expected to fall to 6 per cent on Monday, a sharp decline from a situation last week, when banks were paying over 20 per cent for the short-term money.
RBI slashed CRR by 100 basis points (bps) in two stages of 50 bps each to 5.5 per cent, which will infuse about Rs 40,000 crore. The central bank will inject liquidity through its repo tenders at 7.5 per cent instead of 8 per cent. RBI has also lowered SLR to 24 per cent from November 8 as against the current norm of 25 per cent of the banks’ deposits.
While the overall resource availability will improve, there is some discomfort, given the extent of dollar sales by RBI in the foreign exchange market, which sucks out the rupee.
G-sec yields may rise
Government bond yields could harden slightly on Monday due to a likely decline in bond prices on the cut in the floor rate for SLR by 1 per cent to 24 per cent. Dealers said the yield on the 10-year gilt would touch 7.75 per cent on Monday following the SLR cut. The yield on the 10-year, 8.24 per cent, 2018 benchmark bond ended at 7.50 per cent on Friday.
High dollar demand
RBI’s proactive steps over the weekend to improve liquidity, especially asking entities in need of foreign currency to approach it through banks, are expected to reduce volatility in the market.
There is a spurt in demand for the dollar as oil companies are in the market to raise dollar resources in a large quantity. Moreover, banks have been buying the greenback for proprietary needs (requirements of parent foreign banks) and for foreign institutional investors (FIIs), who are exiting Indian equities.
The rupee is expected to take cues from the global and local share markets. Any fall in global shares may prompt banks to buy dollars on a view that local shares may also tumble, spurring further outflows from foreign funds. However, RBI’s dollar sales through state-owned banks may prevent a sharp fall in the rupee.
