Stocks post best two-day climb in 7 years

Banking stocks lead rally as RBI eases tier I capital regulations

The benchmark indices climbed nearly 2% on Wednesday with the Sensex posting its best two-day gain in nearly seven years as strong global cues and RBI's announcement on capital adequacy norms lifted sentiment.

Banking stocks led the rally on Wednesday after the Reserve Bank of India (RBI) eased tier I capital regulations. This measure, along with two other relaxations, is expected to help shore up the capital of public sector banks.

The banking index and the PSU banking index on the NSE gained 4.9% and 10%, respectively. Lenders SBI and ICICI Bank rose the most, up 12.6% and 7.6% respectively.

International investors have been pulling out from emerging markets, including India, and moving to safe assets like the US Treasury and gold. However, Wednesday was different as they bought shares worth Rs 1,437 crore worth of Indian shares.

Domestic institutions, on the other hand, sold shares worth Rs 593 crore, according to provisional data from the exchanges. In the year to date, foreign institutional investors have sold shares worth more than $2.4 billion. The rupee rose to its highest levelin six weeks against the greenback.

"Let us not celebrate too early. We have to closely watch how China shapes up, the potential amendments in the budget for giving relief to investors and how the kind of action RBI takes in the next few days," said UR Bhat, managing director, Dalton Capital Advisors (India).

India is likely to clock a GDP growth rate of 7.8% in fiscal 2016-17 from 7.6% this year, largely driven by higher discretionary demand, a Nomura report said on Wednesday.

Global equities rose on Wednesday for a second consecutive day on easing concerns about growth in the US, Australia and China. China's stocks rallied the most since.

November led by real estate firms despite Moody's Investors Service reducing the country's credit-rating outlook to negative. Most global equities, emerging market currencies, and crude oil prices had advanced on Tuesday after the People's Bank of China's cut lenders' reserve requirements and the US reported better than expected factory data.

Back home, market breadth was strong with 1964 advances compared with 712 declines. Twenty three out of 30 Sensex components ended in the green. All sectoral indices barring FMCG closed in the green. The major gainers for the day were realty and banking, which gained 5.05% and 4.92%, respectively.

On Tuesday, Indian markets had posted their biggest single-day jump in 30 months, following a sharp rally in consumer and banking stocks on hopes that the RBI would soon slash key policy rates. The sharp spurt in the market triggered a wave of short covering - buying stocks that have been short sold, typically to avoid losses - which further lifted prices.

A recession in China, followed by an EM debt crisis and a geopolitical crisis, remain the biggest tail risk for investors, said experts. "The global cues will still be important. The US seems to be on a mend but the jury is still out on whether China will shape up. Things in Europe are not all that rosy too, with European banks no stronger than they were earlier," cautioned Bhat.