Markets dance to Rajan tune

Banking shares lead Sensex rally; rupee closes at 66.11/$

Call it the Rajan effect. A day after he stunned everybody by announcing a raft of reform measures, the markets on Thursday enthusiastically welcomed Raghuram Rajan, the new Reserve Bank of India (RBI) governor.

Stock markets jumped, led by banking shares, after the rupee firmed against the dollar on optimism surrounding the slew of measures announced by Rajan. Foreign institutional investors (FIIs) net-bought shares worth Rs 1,101 crore amid hopes RBI might unveil more steps to boost the rupee and clean up the mess in the banking system.

The rupee ended at 66.12 a dollar on Thursday, 1.46 per cent higher than its previous close of 67.09. The Indian currency, which opened at 66.04, had touched a high of 65.53 earlier in the day.

Market participants were enthused by the central bank’s move to open a concessional swap window for FCNR(B) deposits of banks which could help lenders access funds at rates below the current levels. The move is also expected to add $10 billion to the foreign exchange reserves and help the rupee stabilise. Bank of America Merrill Lynch expects the FCNR(B) deposit-cum-swap facility to stabilise rupee expectations in absence of a major shock.

“The steps that have been announced (on Wednesday) are structural reforms. Markets liked those because of the clarity with which those was presented,” said Sujan Hajra, co-research head & chief economist, Anand Rathi Financial Services.

BSE’s Sensex gained 412.21 points, or 2.22 per cent, from its previous close to end the day at 18,979.76. NSE’s Nifty rose 144.85 points, or 2.66 per cent, to close at 5,592.95.

The biggest contribution to the indices’ gains came from banks, with the banking index jumping 9.3 per cent, or 938 points — its highest single-day gain since May 2009. YES Bank jumped 21.5 per cent and Axis Bank soared 15.6 per cent. While short-covering was the main reason for the rally, hopes that Rajan might roll back some of RBI’s liquidity-tightening measures, introduced on July 15, also lifted sentiment in these shares.

But, market participants are not in a hurry to conclude that the strength in the rupee and stocks is here to stay. They see the Federal Open Market Committee (FOMC) meeting on September 18, when the American central bank is expected to indicate its plans to roll back its stimulus programme (QE3), as a key driver. Yield on the 10-year US Treasury climbed to 2.94 per cent, its highest level since July 2011, suggesting investors there expected the Federal Reserve to announce a withdrawal after this meeting.

“Though a lot of the QE3 rollback concerns have been factored in, there may be some knee-jerk reaction in the currency and stock markets,” said Hajra.

Rajan has postponed RBI’s mid-quarter review of its monetary policy by a couple of days to September 20 in the wake of the US Fed meeting.

Pramit Brahmbhatt, CEO, Alpari Financial Services (India), said if the rupee strengthened from the current level to 62-63 a dollar, positive sentiment in the currency market might last longer.

“A meaningful improvement in the rupee sentiment will raise the likelihood of a rollback of some of RBI’s recent liquidity-tightening measures in September or October,” said Barclays in a note to its clients. “That said, we acknowledge the risks from greater near-term uncertainties in global markets,” it added.