Sensex jumps 777 pts as Budget fuels rate-cut hopes

Equities rallied Tuesday, a day after the Union Budget, on renewed hopes that the Reserve Bank of India would cut the key interest rate by at least 50 basis points from 6.75%.

The BSE Sensex closed 777.35 points higher or 3.38% to 23,779.35 while Nifty 50 ended 235.25 points up or 3.37% at 7222.30.

Most market participants said the government's budget that achieved the 3.9% fiscal deficit target was the key driver for Tuesday's rally and the markets were eagerly awaiting for the RBI to bring about softer rate regime.

"The imprint of the government's focus areas were visible in agriculture, rural India, weaker sections, infrastructure, the ease of doing business and in administrative reforms. There is a credibility through fiscal prudence," said Ajay Srinivasan, chief executive at Aditya Birla group, on the renewed market sentiment.

Participants said the trend has changed from bearish to bullish. "Today's surprise rally follows an anticipation of rate cut by the RBI in near future, after the government stuck to its fiscal deficit target," said Vijay Singhania, founder director at Trade Smart Online.

"Nifty has changed the short term bias in favour of bulls, and we expect 7350 to be tested shortly," he said.

Foreign institutional investors were net buyers in the cash segment to the tune of Rs 2912.59 crore, while domestic institutional investors were net sellers by Rs 834.59 crore.

However, there was a bulk deal of Rs 1,129 crore in Kotak Bank. Sumitomo Mitsui Banking Corporation divested its stake in Kotak to Canada Pension Plan Fund, a foreign institutional investors. Market dealers said Nifty could see a reversal in trend at around 7500 if the RBI does not come about with a rate cut in the next two days.

"With the fall in crude prices, which is a major input cost in our system, I expect a very positive move on interest rate front as well as on the bond market that will give a great fillip to financial services sector," said Kapil Wadhawan, CMD at Dewan Housing.

Yields on the 10-year benchmark government bonds have been on a declining trend after recently hitting 7.8%. On Tuesday, the yields dipped further by 24 basis points to 7.6% indicating future discounting of RBI's key rate. "Once the bond yield dips below the 6.75% level one can be sure of RBI lowering rates," said a dealer at a brokerage. "The markets are now reading the fine print of the Budget," he said.

According to Wadhawan, the fact that the government wants to introduce guidelines for renegotiation of PPP contracts and reform dispute redressal mechanism, a direction is given towards encouraging private participation in affordable housing projects and road infrastructure.

Many economists are now of the view that the government's initiatives are targeted at sustaining development and creating jobs in the process.

"The markets have reacted to the Budget and we are looking at a pull back rally to 7300 and 7500 levels. Any level above 7600 could indicate a sustained bull run," said an analyst at a foreign fund.