RBI cut, global cues to boost markets

Stocks are set to open on a firm note following steep rate cuts by the central bank and government measures to boost availability of credit to the corporate sectors. Both the rate cuts and government measures were announced after trading hours on Friday, 2 January 2009. Firm global markets will also support domestic bourses which have bounced back in the past few weeks. The BSE Sensex was up nearly 14% in one month to 2 January 2009. However, concerns about corporate earnings may cap upside.

The Reserve Bank of India (RBI) on Friday cut the repo rate and the reverse repo rate by 100 basis points each, with immediate effect. Repo rate is the rate at which RBI lends to commercial banks and reverse repo rate is the rate at which RBI accepts deposits from banks. After the latest cuts, the repo rate is now at 5.5% and the reverse repo is now at 4%, the lowest ever. The RBI also announced a cut in cash reserve ratio, the proportion of deposits banks must keep with the central bank, by 50 basis points to 5% with effect from 17 January 2009. Lower interest rates may revive the domestic economy which has been slowing faster than expected due to high interest rates and the global financial crisis.

Complementing monetary easing by the RBI, the government enhanced the spending power of states with specific measures to boost credit availability in the second fiscal stimulus package. It offered additional sops to exporters and the small-scale sector, besides raising the level of protection for cement and steel sectors a tad. It has also incentivised purchase of commercial vehicles.

Credit availability has been hiked in a variety of ways, the interest ceiling on external commercial borrowings has been removed; the cap on foreign institutional investments in the domestic corporate debt market has been jacked up two-and-a-half times from $6 billion to $15 billion; a special purpose vehicle is being created to lend to non-banking finance companies to the tune of Rs 25,000 crore; Indian Infrastructure Finance Company is being permitted to raise another Rs 30,000 crore by means of tax-free bonds, and states are allowed to borrow an additional Rs 30,000 crore from the market.

In addition, public sector banks would be given additional capital to the extent of Rs 20,000 crore over the next two years, so they can lend roughly 10 times as much additionally.

The latest measures, which come in less than a month after the first package was unveiled on 7 December 2008 are aimed at benefiting housing and non-banking finance firms that lend to infrastructure and finance commercial vehicles.

However, the volatility on the bourses may heighten in the near terms as companies report their Q3 December 2008 results. A domestic brokerage estimates a muted 2.4% growth in net profit of Sensex firms excluding banking and financials firms, in Q3 December 2008 over Q3 December 2007, amid a sharp slowdown in the economy.

Asian stocks surged tracking strong gains in US stocks on Friday, 2 January 2009. Key benchmark indices in Hong Kong, Japan, South Korea, Singapore, China and Taiwan were up by between 0.8% to 2.2%.

US stocks started the new year with a big jump as investors looked beyond yet another piece of grim economic data on hopes that a recovery is on the horizon after a disastrous 2008. The Dow Jones industrial average rose 258.30, or 2.94% to 9,034.69 on 2 January 2009, the first trading day of the new calendar year. The market shrugged off a report by the Institute for Supply Management that said US factory activity fell to a 28-year low in December 2008, showing a more severe contraction than economists had expected.