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Snapping its six-day losing streak markets surged over 1% higher after the Reserve Bank of India (RBI) kept key policy rates unchanged in its mid-quarter monetary policy review on Wednesday.
The central bank's decision came as a pleasant surprise to the street which had factored in a 25bps repo rate (the rate at which RBI lends money to commercial banks) hike and was speculating on whether the RBI would hike cash reserve ratio (CRR), which is the minimum fraction of the total deposits which commercial banks have to keep with RBI.
The repo, Cash Reserve Ratio (CRR) as well as Marginal Standing Facility (MSF) rate were kept unchanged. The repo rate stands at 7.75%, CRR at 4% of banks' net demand and time liabilities while MSF rate at 8.75%
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Benchmarks raliied over 1% while broader markets outperformed too as market participants were expecting a two front assault from both sides of the pacific. While, RBI's monetary policy came as a surprise invetors still wait for some clarity as to when the US Federal Reserve will begin trimming its 85-billion-a-month stimulus programme.
The 30-share Sensex shot up 248 points to close at 20,860 levels and the broader 50-share Nifty ended 78 points higher at 6,217 levels.. In the broader market, the BSE Mid-cap and Small-cap indices ended 1.1 - 1.3% higher.
The rupee was trading higher after the RBI's rate hike. The rupee was at 61.97 versus 62.01 close on Tuesday.
"I think they have merely postponed the rate hike momentum. RBI seems to be keeping its ammunition once Fed taper starts. The decision seems fine in light of the impending taper worries. Regarding taper, markets will get worried if the taper is aggressive. If the taper comes at US$5 bn or US$10 bn initially and then tone is not hawkish then Indian markets should be alright," said Sonam Udasi, SVP and Head of Research, IDBI Capital.
Infaltion peaking in the month of November prompted marketmen to think that a repo rate hike was inevitable owing to RBI governor Raghuram Rajan's inflation targeting stance.
"Recent readings suggest that headline inflation, both retail and wholesale, have increased, mainly on account of food prices. While CPI and wholesale price index (WPI) inflation excluding food and fuel have been stable, despite a steady and necessary increase in administered prices towards market levels, the high level of CPI inflation excluding food and fuel leaves no room for complacency," said the RBI mid-quarter money policy review statement.
Citing slowing growth in the economy and the prospect of easing retail prices, the central bank decided to keep key rates unchanged. Rajan however warned against being complacent on the inflation front and said would he be ready to act even in between policy reviews if headline or core inflation do not ease as expected but in a calibrated manner.
The Consumer Price Index (CPI) inflation numbers rose to 11.24% in November compared with 10.17% in the previous month. The Wholesale Price Index (WPI) inflation data for November rose to 7.52% compared with 7% the previous month.
Asian markets were trading higher with Japan's benchmark index Nikkei leading the gains on reports that the Prime Minister may shortly unveil plans to boost the economy. Nikkei was up 1.6% while Hang Seng was up 0.5%. Shanghai Composite and Straits Times were trading flat.
The BSE Realty index was the top gainer among the sectoral indices, up 3.5% followed by Capital Goods, Oil and Gas, Power, Auto and Bankex.
Realty shares firmed up on hopes that stable interest rates on home loans may revive demand for new homes. DLF ended 5.53% higher at Rs 160.30 and IndiaBulls Real Estate was up over 5% too at Rs 67.60.
Capital Goods shares L&T and BHEL added between 2.83-5.70%% each on hopes that pick up in investment activity would help revive growth in new order inflows.
HDFC extend ended 2.8% up at Rs 667.45 on hopes that the mortgage lender may see growth in home loans as banks are likely to hike rate on home loans.
Bank shares firmed up on hopes that credit growth would continue to remain steady on the back of stable interest rates. SBI, HDFC Bank were up 1.37%-2.67% each.
In the auto pack two-wheeler majors Bajaj Auto and Hero MotoCorp were up over 3% each while Maruti Suzuki and M&M were up 1-2% each on hopes that volume growth would continue on steady interest rates on auto loans.
Among other shares, Biocon moved 11.3% higher at Rs 437.35 on the BSE, after the company said it has entered into licensing and collaboration agreement with Quark Pharmaceuticals Inc for development of range of siRNA (small interfering RNA) based novel therapeutics.
Larsen & Toubro (L&T) has moved higher by 3% at Rs 1,098 after the company said its power transmission vertical has bagged a Rs 2,935 crore order or setting up transmission and distribution network in Qatar.
Market breadth was strong with 1,497 gainers and 951 losers.
