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Equities extend rally on rate cut hopes, but market experts differ

Tuesday, 3 June 2014 - 7:00am IST | Place: Mumbai | Agency: dna

Interest rate cut or not? Bulls, backed by foreign investors who turned buyers since Friday, have betted heavily on a rate cut by the Reserve Bank of India (RBI) at its second bi-monthly monetary policy review slated for today. However, most brokerages dna spoke to believe that the central bank would maintain status quo on key policy rates.

As the rumour mills worked overtime on Monday that Modi would push for growth over inflation, the BSE Sensex rallied 1.93% or 467.51 points to close at 24684.85 while the broader index NSE Nifty gained 132.55 points or 1.83% at 7362.50.

The Nifty Bank index zoomed 3.34% to 15287.25 on account of rate cut hopes and talks that the government would recapitalise PSU banks in a major way. The index had slipped 1.58% to 14,793.40 on Friday.
"In a bull market, such reasons don't matter," said Rahul Shah, vice president, equity advisory at Motilal Oswal Securities. "We are not expecting a rate cut," he said.

With the government data showing a dismal growth of 4.7% for FY14 and news reports of the RBI governor meeting the PM and the finance minister, rumours began doing the rounds that the rate cut was the only way to boost growth and beat inflation, said a dealer at a brokerage.

What has sprung as a major surprise was that foreign institutional investors had invested close to Rs 3,000 crore on Friday after being net sellers to the tune of Rs 732.60 crore for the first four trading days. "The purchases made on Friday gave the confidence that FIIs are here to stay," said UR Bhat, managing director at Dalton Capital Advisors India, a UK-headquartered foreign fund.

On Monday, FIIs purchased equities to the tune of Rs 234 crore, according to a provisional data.

In fact, equities have recouped most losses they made last week on Monday. The Sensex had lost 476 points last week ending Friday but gained 467.51 points on Monday, similarly, Nifty that shed 137 points in the same period gained most of it (132.55) points on Monday.

"Given the current level of inflation (CPI of 8.59%) and the RBI's state policy of bringing down inflation, there is no way one can expect a rate cut at this juncture," Bhat said.

Not all, however, share the same view as in the past the RBI had done a somersault when fundamentals pointed towards a rate hike.

"In January last year and before the budget, the then RBI governor, D Subbarao, cut repo rates (by 25 basis points to 7.75%, with each basis point is equivalent to one-hundredth of a percentage) based on sound bytes of the government that it would make serious efforts to raise resources and cut subsidies," said Arun Kejriwal of Kejriwal Research who is of the view that the RBI could spring a surprise at its Monday policy review.

"Even if that is the case, the new government will not want a rate cut so that it does not appear that the previous government has laid the ground for a rate-cut," said a director at a foreign fund.

But then, going by the Urjit Patel committee recommendations, where reining in inflation is paramount over growth, the RBI is not likely to deviate from targeting inflation first.

"If at all a rate cut has to occur, it would only in the next cycle or next review at best. The Urjit Patel recommendations for the mid-term inflation target is 6% and our view is that the RBI will leave rates unchanged," said Anis Chakravarty, senior director at Deloitte.

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