Buoyancy in equity, bonds ahead of money policy

Tags: News
Equity and bond markets turned buoyant on Monday, hoping that the Reserve Bank of India (RBI) will turn pro-growth at least in talk, if not in action, in Tuesday’s money policy.

Governor Raghuram Rajan has hardly any room to tinker with the policy rates in his second bimonthly policy review. But coming, as it is, days after the Narendra Modi government took office on the promise of growth and development, the market expects RBI to shift from its steadfast focus on inflation.

Equity benchmarks Sensex and Nifty on Monday gained close to two per cent, led mainly by banks and infrastructure (capital goods, power, engineering) stocks. Sensex rallied 467 points to 24,684 while Nifty gained 132.55 points to end at 7,362.50.

Yields rose by 2 basis points to 8.66 per cent in the bond market in a rather cautious move. The market is expected to rally if RBI takes a dovish stand on inflation.

Industry and investors are widely expecting the central bank to provide some impetus to growth in the economy, which expanded at a much slower pace of 4.7 per cent in the financial year ended on March 31.

The market is betting on Rajan offering some growth levers to banks to promote infrastructure projects, while keeping a handle on inflation. The Modi government is in a hurry to push growth and create jobs.

Analysts said the central bank was likely to announce measures to tackle bad loans of domestic lenders and offer incentives on infrastructure loans, as that can cut the cost of funding to projects. Domestic lenders hope that RBI would allow them to raise long-term funds to lend to stalled projects.

Bank of America Merrill Lynch in a report released on Monday said RBI would sooner than later provide banks with an incentive to raise long-term liabilities to cut the cost of funding infrastructure projects.

“Banks could also be incentivised to raise long-term deposits on this basis,” the foreign brokerage said.

Rajan himself hinted at such a line of thinking in a recent speech. “There is an area where banks are at a disadvantage vis-à-vis other financial institutions — in raising and lending long-term money. This becomes especially important for infrastructure, where banks can be essential in early-stage construction financing. Since construction lasts for five to seven years, banks should be able to raise long-tenure money for these purposes. But if they raise such money today, they immediately become subject to CRR and SLR requirements, and any lending they do attracts further priority sector obligations,” he said.

As of FY12, 20.9 per cent of all term deposits held in banks were for five years and above and represented 9.3 per cent of outstanding deposits.

The rupee closed stronger at 59.15 to the US dollar on Monday on expectations of pro-growth initiatives from RBI.

Currency analysts expect the domestic currency to rule in the 59.20-25 range to the dollar on strong demand from oil marketing companies and exporters.

Foreign institutional investors have poured big money in domestic equity and debt to keep investor interest strong. Harihar Krishnamoorthy, treasurer at First Rand Bank, said there was softness in money market rates and FIIs would continue to invest until the Union budget. “There will be a rally in the market if RBI takes a dovish stand.”

Deep Mukherjee, senior director at India Ratings, said FII inflow was helping the rupee. “The six-month Libor has fallen by 40 basis points to 0.4 per cent during this period of rupee appreciation. The rate differential is attracting FIIs. Should the rate differential disappear, there is a risk of the FII money flowing out,” Mukherjee cautioned.

Paras Bothra, vice-president for equity research at Ashika Stock Broking, said the market was expecting some measures from RBI to tackle bad loans, which triggered a rally in bank shares.

BSE bankex gained 3.28 per cent with all constituents closing with gains; SBI rallied 4.02 per cent, Axis Bank 3.61 per cent, HDFC Bank 3.26 per cent, ICICI Bank 3.10 per cent and Punjab National Bank 3.67 per cent.

Smaller PSU players too rallied; Central Bank of India rose 11.05 per cent, Syndicate Bank 11.63 per cent, Andhra Bank 6.19 per cent, Canara Bank 6.18 per cent and Bank of Maharashtra 4.38 per cent.

The capital goods counter was also abuzz, with the index that represents the industry gaining 4.93 per cent. Among the big gainers were L&T (6.23 per cent), BHEL (2.68 per cent), Siemens (5.35 per cent) and ABB India (2.47 per cent).

The BSE power index rose 2.38 per cent; top gainers included Reliance Power (5.33 per cent), Adani Power (2.40 per cent), Tata Power (2.02 per cent), Lanco Infratech (4.93 per cent) and GMR Infra (2.40 per cent).

Midcap stocks too rallied, lifting benchmark BSE midcap index 2.16 per cent to near its November 2010 peak of 8,730.30. But, it was still way behind its 2008 peak of 10,113.06.

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