Sensex factors in RBI’s move to hold rates steady, ends up 0.5%

The central bank in its first quarter monetary policy review on Tuesday, decided to keep key rates unchanged as it chose to control inflation over supporting growth. Soon after the announcement, the markets did slip a little but recovered to end tad up. The Nifty hit an intra-day low of 5154. The 30-stock BSE Sensex ended at 17,236, up 92 points or 0.5% from the previous close. It touched a day’s high of 17,253 and a day’s low of 17,004. It opened at 17,186. The broader NSE Nifty closed at 5,229, up 29 points or ~0.6% from the previous close. It touched a day’s high of 5,234 and a day’s low of 5,154. It opened at 5,214. Market participants had mostly expected the apex bank to hold rates in this review, thus largely pricing in the effect. Positive cues from the Asian markets and some buying seen in the index heavyweights like ONGC, Wipro, Reliance Industries, Tata Motors and DLF had also helped Indian markets which ended with gains for third straight trading session on Tuesday. Against this backdrop of heightened global uncertainty and domestic macroeconomic pressures, the challenge for monetary policy is to maintain its priority of containing inflation and lowering inflation expectations, the RBI said in a statement. Lowering policy rates right now will aggravate inflation, the central bank added. Typical for a day of the Reserve Bank of India’s monetary policy review, markets were trading flat in the morning session ahead of the announcement. RBI’s repo rate now stands at 8%, the reverse repo rate at 7% and the Cash Reserve Ratio at 4.75%. Meanwhile, the marginal standing facility (MSF) rate and the Bank Rate are at 9% each. The RBI did, however, cut its Statutory Lending Ratio to 23% from 24% earlier. The SLR cut will enable banks to lend up to Rs.620bn. "In line with market expectations, the RBI kept the repo rate (8%) and CRR (4.75%) unchanged. In a bid to keep liquidity conditions benign, the RBI surprised the market by lowering SLR requirement to 23% from 24%. This reduction may lend a downward bias to the short term rates enabling transmission of future policy rate cuts. It would also ensure that government borrowings don’t crowd out private credit demand in the medium term. The SLR reduction however, is unlikely to benefit NIMs of banks in the near term with most banks already operating with higher than mandated SLR ratio. Having said that, continued easy liquidity conditions could benefit wholesale funded banks such as Yes, ICICI Bank and Axis, says Amar Ambani, Head of Research, IIFL. The lowering of GDP growth forecast and upgrade of inflation projection was not a surprise. Even if monsoons were to revive, a deficit of ~15% looks likely. This will add to the downward pressure on GDP, which we expect at 5.6-5.8% for FY13. With future policy actions hinged on inflation trajectory/expectations, liquidity conditions and government’s reform action, a repo rate cut in the upcoming September policy also looks unlikely," he added. As expected, the BSE Bankex was among the losing sectoral indices. Meanwhile, the rate sensitive sectors ended in the positive territory pricing in the RBIs move and on the expectation that the bank would act sooner or later to aid growth. Among the broader markets, the BSE Mid-Cap index gained in line with its large-cap counterparts, up ~0.6% but the BSE Small-Cap index rose only 0.1%. The INDIA VIX on NSE gained by 0.56% to close at 16.01. It hit a day’s high of 17.13 and a day’s low of 15.93. The market breadth on the BSE was positive, 1438 stocks ending higher and 1293 stocks slipped. Grasim, ONGC, DLF, Sterlite, ACC, Wipro, Asian Paints, Tata Motors and Sesa were the notable gainers on the Sensex and the Nifty today. Bharti Airtel, Bank Baroda, Hero Motocorp, Jindal Steel and Reliance Infra were among the losers on the Nifty. Globally, most Asian markets advanced on Tuesday, the Nikkei index in Japan and Hang Seng index in Hong Kong extended rally to fourth straight day amid hopes for policy easing from major global central banks and some positive earnings reports. However, the China’s Shanghai Composite Index was down -0.30%, finishing at its worst level since March 2009. The European markets were trading mixed, the FTSE index in UK was down 0.2%, DAX index in Germany gained 0.5% and the CAC index in France was up 0.2%. The unemployment rate in the euro zone stood at 11.2% in June, unchanged. The rate is the highest since the current statistical series began in 1995. Sectoral indices ended mostly higher barring Consumer Durables, Bankex and Power which fell 1.8%, 0.3% and 0.2% respectively. Oil&Gas, Realty, IT, Pharma, Metals and PSU were the gainers. IT stocks were in focus after the RBI today withdrew a previous order that made it compulsory for exporters to convert half of their forex earnings kept in local banks into rupees. The BSE IT index rose 0.8%. The RBI said in a press release on Tuesday that it has now decided to restore 100% credit in foreign currencies to provide operational flexibility to foreign-exchange earners. However, the total of the accruals in the exporter account should be converted into rupees on or before the last day of every month. This should be done after adjusting for utilization of the balances for approved purposes or forward commitments, the RBI said. The central bank also allowed exporters to cancel and rebook forward contracts up to 25% of their total contracts for hedging.