Markets calm as RBI leaves rates unchanged

Stocks recover on the central bank hinting rate-cuts early next year

Shares saw a sanguine reaction to the Reserve Bank of India's decision to leave key rates unchanged during its policy review on Tuesday. Even though the BSE Sensex dipped 160 points, or 0.6 points immediately after the announcement, but it has since picked up and seems to be slowly moving up.

The BSE Sensex is currently trading at 28,426 down 0.5% after having touched a low of 28,386. The NSE Nifty has also slipped down 0.5% and is trading at 8,518.

However, the volatility index, India VIX, is down 2.8% to 12.8.

Bank stocks, where changes to the monetary policy are immediately reflected, also saw a sharp fall of over 1.2%. The banking index CNX Bank Nifty is at present trading at 18,456.

Analysts said that the market had been encouraged by dovish statements made by the RBI about a possible rate-cut early next year on the back of improving inflation and macro-economic data. Market participants now believe that the rate-cut is imminent in the first half of 2015.

"Markets are very happy with the outlook given by the RBI. The expectation is that there could be a rate-cut in February next year. The sharp run-up that we saw ahead of the RBI policy now means that the markets could see some correction in the near-term," said Sunil Jain, VP (equity research), Nirmal Bang Securities.

As per market participants, the Nifty and Sensex could see a dip of about 3-5% going forward. The Nifty could slip to about 8,150-8,200 levels, analysts said, while the BSE Sensex to go as low as.

Last week, markets had rallied over 1.2% on anticipation of a rate-cut as inflation had fallen to about 5% and the improvement in the GDP data to 5.3%, both better than market expectations. The BSE Sensex gained over 350 points taking the monthly gains to about 828 points. The Nifty has gained over 266 points.

The Bank Nifty had gained over 2.5% last week as bank stocks saw a sharp surge. But the rally played out more in the under-owned public sector banks than the private lenders. PSU banks like SBI, Bank of Baroda and Punjab National Bank climbed about 5-10%. Large private banks like HDFC Bank, ICICI Bank and Axis Bank rose in the 2-3% range.

Among the Sensex 30, stocks of the metal and infrastructure sector were up. Sesa Sterlite and L&T were up about 1.2% each followed by telecom major, Bharti Airtel at 0.9%. NTPC and Hindalco were up over 0.8% each.