Sensex ignores IIP as rate cut hopes soar

The main Indian equity benchmarks recovered from a slow start and downbeat IIP data to post solid gains, with the NSE Nifty ending above 5,100. Things went completely opposite today on Indian bourses as compared to Monday when a bright start was marred by the S&P bombshell. Today, the main indices started lower but recovered soon after the release of the IIP data for April on hope that the RBI will announce further policy easing in order to revive the faltering Indian economy. Rate sensitive sectors such as Banks, Real Estate, Auto and Capital Goods led from the front. Pharma index was the only sector that closed in the red. The INDIA VIX was down more than 3%. Surprisingly, the market breadth was only slightly positive as the broader indices didn’t do quite as well as their Large-Cap peers. The BSE Sensex ended at 16,862, up nearly 200 points, or 1.2% from the previous close after being as high as 16,897 and as low as 16,553. It had opened at 16,570. The NSE Nifty settled at 5,115, up 62 points or 1.2% from the last close. It earlier touched a day's high of 5,128 and a day's low of 5,015. Maruti, Tata Motors, L&T, DLF, Sterlite Industries, Hindalco, ONGC, SBI, M&M, HDFC Bank, ICICI Bank, ITC, Infosys, Ambuja Cements, ACC, PNB, Axis Bank, BPCL and Reliance Infra were among the top gainers. Wipro, Dr. Reddy’s and Ranbaxy were the notable losers. Among the sectoral plays, the hope of a rate cut by the RBI spurred buying interest in Bankex, Realty, Auto and Capital Goods which rose between 1.5-2%. Other notable gainers were Consumer Durables, PSU, Power and Metals. Pharma was the only loser among the sectoral indices, down 0.3% The broader markets could not keep up with their large cap counterparts. The BSE Mid-Cap index rose 0.6% while the BSE Small-Cap index gained 0.3%. India's industrial production barely expanded in April, as manufacturing growth came to a standstill and mining output contracted. Capital Goods, which is the barometer of investments in the economy, also witnessed a sharp drop in output in the first month of FY13. The combined output of Factories, Mines and Power Utilities, as measured by the index of industrial production (IIP), grew by a measly 0.1% in April as against a 5.3% growth in April last year, the Commerce Ministry said today. The three main constituents of the IIP are Mining, Manufacturing and Electricity. The monthly growth rates of these three sectors for the month under review stood at (-)3.1%, 0.1% and 4.6% respectively. As per "use-based" classification, there has been negative growth in Intermediate Goods (-1.4%) and Capital Goods (-16.3%) while growth has been achieved in Basic Goods (2.3%), Consumer Durables (5.0%) and Consumer Non-durables (5.4%). The Government has revised March's IIP reading, from a 3.5% decline to a 3.2% drop. Separately, State Bank of India (SBI) Chairman Pratip Chaudhuri said today that the Reserve Bank of India (RBI) is expected to slash the Cash Reserve Ratio (CRR) by 100 basis points to lift economic growth. "We expect the RBI to cut CRR by 1%...It will ease liquidity significantly and lower interest rate," SBI Chairman told reporters. On the possibility of cut in the repurchase rate (repo rate) by the RBI on June 18, Chaudhuri said "repo rate cut is meaningless because it is more symbolic and its impact is not very substantial". India's GDP growth dipped to a nine-year low of 5.3% in the January to March quarter of FY12. The Indian economy expanded by 6.5% in the year ended March 31, 2012 as against the Government's provisional forecast of 6.9%. India's GDP grew by 8.4% in FY11. The Government expects India's economy to grow by 7.6% in FY13 but recent data points have increased downside risks to that estimate. "The disappointing IIP numbers for April has once again fueled hopes of a repo rate cut by the RBI at its policy meeting on June 18. There is also speculation that the central bank may even slash the CRR to ease the liquidity crunch. But, whether the RBI will oblige the markets and the Government is anybody's guess as of now. However, only a monetary stimulus will not be suffice to boost growth. The Government needs to take some strong steps to lift the sagging spirits of investors (corporates as well financial investors) and prevent a downgrade to junk status by Standard & Poor’s," says Amar Ambani, Head of Research, IIFL. Earlier, the Indian stock indices lost some ground, extending the losses from the previous session, when the Standard & Poor's warning of ratings downgrade spooked investors. Also dampening the sentiment were doubts about the effectiveness of the Spanish bank bailout and anxiety ahead of the June 17 Greek elections. Slow progress of southwest monsoon, slowdown in car sales, continued policy inertia and a weaker local currency were some of the other factors that affected the mood of the markets early in the session. S&P’s warning to India that it could well become the first fallen angel in BRIC revived fears of a possible downgrade to junk. The government instead of wanting to make representations to rating agencies and suggest a rating change should instead channelise its resources to salvage the economic situation. Asian markets closed mostly lower today, as initial optimism over the Spanish banks' rescue package faded and worries resurfaced over the fate of the eurozone ahead of Greek elections on June 17. Markets across Europe and the US finished lower on Monday, as the initial elation over the Spanish bank rescue gave way to skepticism. Who will foot the bill for the Spain bank bailout? That is the question uppermost on minds of Spanish bondholders. In addition, there is the looming threat from the upcoming Greek elections (June 17) and its fallout on the teetering eurozone economy. Surprisingly, the ECB stayed out of government bond markets for a 13th straight week despite Spain's soaring borrowing costs. The Nikkei closed down by ~1% while the Hang Seng dropped ~0.4%. The Shanghai Composite index shed 0.7% while the Kospi in South Korea lost ~0.7% and the Straits Times finished flat. The Taiex in Taiwan was down ~0.7%. Australia's S&P/ASX 200 index rose 0.2%. European stocks advanced modestly at start, recovering from the previous session's volatile movements when the main regional indices erased all the day's gains to close in the red. While the indices in Germany, France, UK and Spain were holding on to modest gains, the index in Italy was trading with a negative bias. Pressure persisted on Spanish and Italian bond yields. Spain's 10-year yields rose 16 basis points to 6.68%, while those for Italy rose 12 basis points to 6.16%.