Mumbai: A bouquet of domestic announcements strew rose petals in the path of the Indian equities market, helping it buck the trend in the bearish global markets on Tuesday.
Industry friendly measures from the RBI and the Finance Minister sent the Sensex and the Nifty rising to their two-month highs to top the list of index gainers globally. This, against a backdrop of the US markets closing flat on Monday after US crude oil futures hit a record high of $119.93 a barrel.
The Indian indices opened in the green on Tuesday, and then moved into the red, then remained in this volatile state till forenoon, when the first booster shot was delivered by the RBI Governor; there was to be no change in the key lending and borrowing rates, but only a hike in CRR.
The reaction was immediate, and sharp! The interest-sensitive bank, realty and auto stocks were the first off the volatile seesaw, moving up decisively at noon.
The RBI’s projection of 8 to 8.5 per cent economic growth in the current financial year was also positive for the markets.
“The commendable part is that even after these measures, the Indian economy is expected to sustain an 8 per cent GDP growth, which still remains attractive, given the slowdown being witnessed in the global economies,” said Hitesh Agrawal, Head of Research, Angel Broking.
“The RBI showed its concern about the slowdown in growth by keeping both the repo and reverse repo rates unchanged in its policy. And the markets have responded favourably, led by real estate, mortgage and software companies,” said S. Ranganathan, head of Research, LKP Securities.
RBI’s measure raising the outward foreign direct investment limit in excess of the current limit of 400 per cent of a company’s net worth for certain sectors, and the extension of the time period for the repatriation of the export proceeds lent more adrenalin to the markets. As this news trickled in, the rupee (which had already opened weak) dropped further, closing around 30 paise lower at Rs 40.46 to the US dollar.
Exemptions Impact
The Finance Minister’s announcement in Parliament an hour later, around 1 pm, extending tax exemptions to software technology parks till March 2010 in reply to a debate on the Finance Bill for FY09 had a further distinct impact on IT stocks, sending the BSE IT index from the bottom to the top among the sectoral indices on the BSE.
On the old economy stocks front, the Minister’s announcement of scrapping import duty on zinc and metallurgical coke lifted metal stocks. The Minister announced an ad valorem duty of 12 per cent on cement priced above Rs 250 a bag replacing last year’s fixed excise duty of Rs 600 a tonne. This, it was felt, would help contain inflation.
The total gains that piled on the Sensex mounted to over 400 points after the RBI and Finance Minster’s measures, though the benchmark index cooled off a bit later, closing with a gain of 362 points at 17,378, up by 2.13 per cent from Monday’s close. The Nifty gained 2.08 per cent to close at 5,195.
The cooling off was in part accounted for by banking stocks, as there was some displeasure on the part of investment banks on the CRR (cash reserve ratio) hike of 25 basis points.
“The current CRR hike and prospects for more will be negative for banks as it would hurt their margins,” said Tushar Poddar, Vice-President, Asia Economic Research Team, Goldman Sachs India.
Liquidity
The CRR rate, which is now 8.25 per cent with Tuesday’s 25 basis point hike, has come after the 50 basis point CRR hike announced earlier this monrth. In all, the 75 basis point CRR hike is estimated to suck out around Rs 28,000 crore from the system.
“On the banking sector per se, the impact of the same would be negative, especially for PSU banks, which have a lower fee component to their overall business pie as compared to the private players in the space,” said Hitesh Agrawal.
“The hike in CRR indicates that RBI’s preferred tool would continue to be liquidity management and they would use CRR and MSS (Market Stabilisation Scheme) to ensure that systemic liquidity remains balanced,” said Navneet Munot, Executive Director, Morgan Stanley Mutual Fund.
Bonds
Bond prices surged by over one rupee as the RBI kept key rates unchanged in its monetary policy. Bond dealers said that there was a sense of relief in the market since the widely held view was that the repo rate would be hiked by the RBI.
Industry friendly measures from the RBI and the Finance Minister sent the Sensex and the Nifty rising to their two-month highs to top the list of index gainers globally. This, against a backdrop of the US markets closing flat on Monday after US crude oil futures hit a record high of $119.93 a barrel.
The Indian indices opened in the green on Tuesday, and then moved into the red, then remained in this volatile state till forenoon, when the first booster shot was delivered by the RBI Governor; there was to be no change in the key lending and borrowing rates, but only a hike in CRR.
The reaction was immediate, and sharp! The interest-sensitive bank, realty and auto stocks were the first off the volatile seesaw, moving up decisively at noon.
The RBI’s projection of 8 to 8.5 per cent economic growth in the current financial year was also positive for the markets.
“The commendable part is that even after these measures, the Indian economy is expected to sustain an 8 per cent GDP growth, which still remains attractive, given the slowdown being witnessed in the global economies,” said Hitesh Agrawal, Head of Research, Angel Broking.
“The RBI showed its concern about the slowdown in growth by keeping both the repo and reverse repo rates unchanged in its policy. And the markets have responded favourably, led by real estate, mortgage and software companies,” said S. Ranganathan, head of Research, LKP Securities.
RBI’s measure raising the outward foreign direct investment limit in excess of the current limit of 400 per cent of a company’s net worth for certain sectors, and the extension of the time period for the repatriation of the export proceeds lent more adrenalin to the markets. As this news trickled in, the rupee (which had already opened weak) dropped further, closing around 30 paise lower at Rs 40.46 to the US dollar.
Exemptions Impact
The Finance Minister’s announcement in Parliament an hour later, around 1 pm, extending tax exemptions to software technology parks till March 2010 in reply to a debate on the Finance Bill for FY09 had a further distinct impact on IT stocks, sending the BSE IT index from the bottom to the top among the sectoral indices on the BSE.
On the old economy stocks front, the Minister’s announcement of scrapping import duty on zinc and metallurgical coke lifted metal stocks. The Minister announced an ad valorem duty of 12 per cent on cement priced above Rs 250 a bag replacing last year’s fixed excise duty of Rs 600 a tonne. This, it was felt, would help contain inflation.
The total gains that piled on the Sensex mounted to over 400 points after the RBI and Finance Minster’s measures, though the benchmark index cooled off a bit later, closing with a gain of 362 points at 17,378, up by 2.13 per cent from Monday’s close. The Nifty gained 2.08 per cent to close at 5,195.
The cooling off was in part accounted for by banking stocks, as there was some displeasure on the part of investment banks on the CRR (cash reserve ratio) hike of 25 basis points.
“The current CRR hike and prospects for more will be negative for banks as it would hurt their margins,” said Tushar Poddar, Vice-President, Asia Economic Research Team, Goldman Sachs India.
Liquidity
The CRR rate, which is now 8.25 per cent with Tuesday’s 25 basis point hike, has come after the 50 basis point CRR hike announced earlier this monrth. In all, the 75 basis point CRR hike is estimated to suck out around Rs 28,000 crore from the system.
“On the banking sector per se, the impact of the same would be negative, especially for PSU banks, which have a lower fee component to their overall business pie as compared to the private players in the space,” said Hitesh Agrawal.
“The hike in CRR indicates that RBI’s preferred tool would continue to be liquidity management and they would use CRR and MSS (Market Stabilisation Scheme) to ensure that systemic liquidity remains balanced,” said Navneet Munot, Executive Director, Morgan Stanley Mutual Fund.
Bonds
Bond prices surged by over one rupee as the RBI kept key rates unchanged in its monetary policy. Bond dealers said that there was a sense of relief in the market since the widely held view was that the repo rate would be hiked by the RBI.
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