Market may extend gains on rate cut

The market may extend Friday's (31 October 2008) solid gains after a surprise rate cut by the central bank over the weekend and on firm Asian stocks. Heavy buying by foreign funds and the stock market regulator’s decision to increase tenure for lending and borrowing of stocks from seven days to 30, may also aid an upmove.

Lower rates boosts stocks as they boost corporate bottomline by way of lower borrowing costs. The Reserve Bank of India (RBI) on Saturday, 1 November 2008, unexpectedly cut its main short-term lending rate for the second time in as many weeks to ease a growing cash squeeze, spur faltering economic growth and fend off damage from the global financial crisis.

The Securities & Exchange Board of India (Sebi)'s decision to extend the tenure for lending and borrowing of stocks is aimed making the domestic stock lending and borrowing (SLB) mechanism more robust and increase liquidity in the secondary markets. Short selling refers to selling of shares one does not own and a SLB mechanism facilitates this activity.

Meanwhile, in contrast to heavy selling for the last few months, foreign funds made substantial purchases on Friday. As per provisional data released by the stock exchanges, foreign institutional investors (FIIs) bought shares worth a net Rs 1237.21 crore. FII outflow in October 2008 totaled Rs 15,347.30 crore (till 29 October 2008). FII outflow reached Rs 52,139 crore in calendar 2008, so far, till 29 October 2008

Asian stocks edged up for a fifth straight day on Monday, 3 November 2008, on hopes policy efforts so far to dampen the impact of the financial crisis would ultimately take hold, though data still painted an ugly picture of the global economy.

Back home, the BSE Sensex jumped 743.55 points or 8.22% on Friday, boosted by a steep rate cut by the US Federal Reserve, decline in inflation for the fifth successive week and market buzz the government was considering more measures to pump in liquidity in the financial system