Rajan lifts markets but caution reigns

Though the US Fed isn't expected to announce a cut in QE3, investors expect a road map for the withdrawal

 

Reserve Bank of India (RBI) Governor Raghuram Rajan’s surprise move to keep the policy rate unchanged sparked a rally in stocks on Wednesday. However, the gains were measured, as investors awaited the outcome of the US Federal Reserve meeting on Wednesday night, which might decide whether its huge monetary stimulus would continue in its current form.

Though the Fed isn’t expected to announce a cut in its bond-buying programme, known as quantitative easing, on Wednesday night, investors feel the American central bank would reveal a road map for the withdrawal.

Foreign institutional investors (FIIs) showed no signs of nervousness ahead of the US Fed meeting, with share purchases of Rs 1,198.6 crore on Wednesday, according to provisional data. So far this month, foreign investors have bought shares worth Rs 7,800 crore.

“A mild taper announcement is already discounted by the Street and if the Fed does not announce any taper timeline, markets will take it positively,” said Dipen Shah, head (research), private client group, Kotak Securities.

The BSE Sensex gained 247.72 points, or 1.2 per cent, to close at 20,859.86, snapping a six-day losing streak. The CNX Nifty on the National Stock Exchange rose 78.1 points, or 1.27 per cent, to close at 6,217.15.

Analysts said there might be little merit in reading too much into Wednesday’s stock gains, as there were largely driven by short-covering. Optimists will take heart that traders’ expectations of strong support for the Nifty shifted from 6,000 to 6,100, considering the build-up of positions in 6,100 puts.

Unless the Fed sprang a surprise, the Nifty might continue to move in the 6,100-6,300 band, said traders. Three months ago, the Fed had surprised the markets by deciding not to cut its $85-billion-a-month bond-buying programme. The move resulted in billions of dollars flowing into emerging markets, including India. Since September, FIIs have bought shares worth about Rs 45,000 crore.

Banks, real estate and auto shares led the rally on Wednesday, following RBI’s move to keep the repo rate unchanged. Investors were expecting a 25-50-basis-point increase in the policy rate, as inflationary pressures were yet to recede. NSE’s Bank Nifty gained 1.3 per cent, while the auto index rose 1.7 per cent. Among banks, shares of public sector lenders were the top gainers, with the CNX PSU bank index surging about three per cent.

“With inflation expectations still on an upward arc and the central bank admitting core CPI inflation is too high, today’s delay probably delays the inevitable and increases the risk of more aggressive tightening next year,” said Richard Iley, chief Asia economist, BNP Paribas.

The optimism in frontline shares also rubbed off on the broader market, with mid- and small-cap indices rising about 1.5 per cent each on Wednesday.