A day after rate cut, stocks up, bonds ease

Rupee at one-month high; bond yield eases to the lowest in 26 months

The positive impact of a surprise rate cut by the Reserve Bank of India (RBI) on bond, currency and equity markets continued for a second straight day on Wednesday. While the yield on the 10-year bond eased to a 26-month low, the rupee touched a one-month high, and the benchmark stock indices Sensex and Nifty rallied 1.4 per cent each.

In its fourth bi-monthly monetary policy review, the Reserve Bank of India (RBI) had on Tuesday reduced the repo rate - the rate at which banks borrow from the central bank - by 50 basis points, more than the Street's expectation of a 25-basis-point cut. The rate now stands at 6.75 per cent.

"After a 50-basis-point rate cut, the yield could not have fallen by 30-40 basis points in one day. So, the positive impact continued for a second day. After Tuesday's rate cut, the yield on the 10-year benchmark bond should fall by at least 25 basis points. It is heading towards 7.45 per cent," said Anoop Verma, vice-president (treasury), DCB Bank.

The yield on the 10-year bond on Wednesday ended at 7.54 per cent, compared with 7.61 per cent a day before and 7.73 per cent on Monday. That means the yield has softened by 19 basis points in the past two trading session. The previous low, of 7.53 per cent, was seen on July 12, 2013.

Adding to the cheer, RBI on Tuesday also decided to enhance the investment limits for foreign portfolio investors (FPIs). It said the limits for FPI investment in central government securities would be increased in phases by March 2018 to five per cent of the outstanding stock.

The government's borrowing programme for the second half of the financial year will start from Thursday and, according to Ashutosh Khajuria, executive director, Federal Bank, these positive moves will lead to a much smoother borrowing programme. The government will borrow Rs 2.34 lakh crore by way of dated securities in the second half of the financial year.

Meanwhile, the rupee on Wednesday strengthened against the dollar to end at 65.59, compared with 65.96 a dollar on Tuesday. The Indian currency had closed at 65.55 per dollar on August 20. "The double benefit of a dovish RBI and risks on recovery in emerging-market currencies and stocks helped the rupee. It gained between 0.5 per cent and 0.9 per cent against major currencies," said Anindya Banerjee, associate vice-president (currency derivatives), Kotak Securities.

The stock market joined the party on Wednesday, rallying for a second straight day. The BSE benchmark Sensex and the National Stock Exchange's Nifty gained 1.4 per cent each, mirroring upbeat global markets amid a rebound in riskier assets like commodities and emerging-market currencies.

The Sensex gained 376.17 points over previous close to end at 26,154.83, while the Nifty added 105.6 points to 7,948.9. Both indices, however, posted their worst quarterly performances since December 2011.

Most European markets had opened two per cent higher, while Asian ones had gained around one per cent after Tuesday's drop.

The gains on Wednesday were led by commodity companies, as higher metal prices and a rebound in shares of Glencore Plc boosted the sentiment. Tata Steel gained over five per cent, while Coal India and Hindalco added nearly four per cent each.

Interestingly, the sectoral banking indices ended with losses on Wednesday, despite a rally in the bond market. Shares of State Bank of India, Bank of Baroda and Axis Bank lost nearly two per cent each.

Experts said though a softening in bond yields would lead to treasury gains, the cut in base rates by banks would negatively impact their margins for the short term.

"While net interest margins (NIMs) can contract with lower rates, we expect a pick-up in economic activity, and loan growth can compensate for the lower margins over time. Lower credit costs due to increased ability of companies to service their loans will be another way by which financials will benefit," said Anand Kumar, analyst, Bank of America Merrill Lynch.