Markets wish for rate cut, indices soar 1.3%

September auto sales, easing border tensions aid sentiment

Expectations of rate cut by the Reserve Bank of India (RBI) saw the benchmark indices rally more than a per cent and mid- and small-cap indices spurt over 2.5 per cent on Monday. Biggest sales growth in over two years saw automobile stocks post sharp gains, with Maruti Suzuki jumping 3.7 per cent and Hero Motocorp adding 3.2 per cent. Banking stocks including State Bank of India and Axis Bank also gained nearly two per cent as yields on the 10-year government security (g-sec) softened by four basis points. The RBI will announce its interest-rate decision on Tuesday with inputs from newly-setup monetary policy committee (MPC).

“The market is expecting 25 basis points cut. There is high possibility that the expectation will be delivered,” said UR Bhat, managing director, Dalton Capital Advisors. “There is also an economic argument for rate cut with inflation coming down and also yields on the benchmark g-sec coming down sharply over the last few months.”

Besides rate cut hopes, positive global cues and steps taken by India and Pakistan to ease military tensions also boosted investor sentiment. The BSE Sensex rose 1.35 per cent, or 377.33 points, to 28,243.29, while the Nifty 50 added 1.47 per cent, or 127 points, to 8,738. The Indian markets had given up nearly three per cent last week amid escalation of tensions between India and Pakistan.

Analysts said overseas investors will keenly eye the developments on the military front. “The recent developments on the Line of Control need to be viewed against the backdrop of heightened global uncertainty, rich valuations of the Indian equity market and weaker-than-expected economic recovery. We expect investors to build higher risk premium if one or more unfavorable events play out,” said Sanjeev Prasad, senior executive director & co-head, Kotak Institutional Equities.

Foreign investor buying was muted on Monday, while domestic institutions were net sellers to the tune of Rs 200 crore. Most global markets gained on Monday after reports that Deutsche Bank is nearing a less-costly settlement with US regulators. Concerns over the health of the Germany’s biggest lender had hurt financial markets last week.

In the near term, Prasad said, the markets will be guided by events like normalization or escalation of matters between India and Pakistan, containment or contagion of the problems in certain European banks, outcome of the US elections, Italy referendum and December 2016 US Fed meeting.

The BSE Midcap and Smallcap indices surged 2.4 per cent and 2.7 per cent respectively, as over three stocks advanced for every one declining. The India VIX index cooled off nine per cent after last week’s spike. “In our view, investment risks have gone up over the past few weeks but so far the issues look manageable,” he said.