Mumbai: Equity benchmarks rose over 2 per cent - the highest single day gain in 12 months - to end at seven month highs as investors are viewing the government’s steps on fuel price as a precursor to the Reserve Bank of India cutting policy rates shortly. The 30-share BSE Sensex surged 443.11 points to close 18464.27 and the 50-share Nifty vaulted 142.30 points to finish the day at 5577.65.
Sentiment was also buoyed by the US Federal Reserve’s move to continue with its bond purchase program as part of its policy to infuse liquidity into the banking system and revive the US economy. Here too, the bullishness appears to be based on more on hope than reality. Players expect a decent chunk of the excess liquidity in the US to find its way into emerging markets India included. The mood was so upbeat that the market ignored the higher-than-expected inflation reading of 7.55 per cent for August.
However, it will not be an easy ride for the bulls.
With diesel prices being hiked, it is feared that inflation could climb further in the coming days, which along with high crude oil prices, could hold the RBI back from cutting interest rates.
The government's move to hike diesel price and cap the number of subsidized cylinders per household will ease the strain on its subsidy bill to an extent, and reduce the possibility of a downgrade, investors feel.
“While these much awaited measures clearly improves GoI’s (government of India’s) image in respect of implementing reforms and reduces rating downgrade risks, it would not significantly address the staggering under recoveries issue,” wrote Mayur Patel of Spark Capital Advisors in a note to clients.
But others like Ambit Capital and Deutsche Bank are of the view that the market could continue to rally for some more time.
“While coalition dynamics continues to play spoilsport and has made investors
highly skeptical on domestic policy related issues, we believe that stressed
fiscal balances, fears of a sovereign rating downgrade and rapidly eroding
domestic confidence have compelled the government to move ahead on
politically contentious issue of fuel price rationalization,” wrote Abhishek Saraf and Abhay Laijawala of Deutsche Bank in a note to clients.
“This, coupled with recent constructive commentary from finance ministry (such as GAAR deferral) should galvanize hopes that the government of India is keen to reinforce confidence of both corporates and investors and avert the risk of a sovereign rating downgrade,” the note said.
And Ambit analysts Saurabh Mukherjea and Gaurav Mehta don’t think weak corporate earnings and the possibility of further cuts in GDP estimates is a cause of major worry.
“Not only do consensus EPS estimates invariably lag stock markets at critical turning points, even GDP growth has no impact on stock market returns in India or elsewhere,” said the Ambit note to clients.
Frontline indices were fired up by a 5 per cent rise each in Reliance Industries, State Bank of India, Larsen & Toubro and ICICI Bank.
Overall, banks were the star performers of the day, with Axis Bank, Bank of Baroda, Indian Bank, Yes Bank and Canara Bank gaining 5-6 per cent.
Shares from the realty, metal, and automobiles were among the other notable gainers of the day.
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