Markets surge on hope of more liberal policy stance
Markets believe Patel’s exit as RBI governor may lead to a relaxation in the banking sector, besides the possibility of a rate cut in the second half of 2019, say analysts
MUMBAI: Benchmark stock indices closed nearly 2% up on Wednesday as investors expected more dovish monetary policy from newly appointed Reserve Bank of India (RBI) governor Shaktikanta Das.
The Sensex closed at 35,779.07, up 629.06 points, or 1.79%, while the 50-share index Nifty ended at 10,737.60, up 188.45 points, or 1.79%. Global stocks ended higher, following news reports indicating easing of tensions between the US and China.
According to analysts, markets believe Urjit Patel’s exit as RBI governor could lead to a relaxation in the banking sector and liberal monetary policies, besides the possibility of a rate cut in the second half of 2019.
“We believe Das stands in the neutral-to-slightly dovish spectrum on monetary policy. The monetary policy committee (MPC) structure will ensure policy continuity, but since Das replaces a more hawkish Patel, the MPC’s composition, at the margin, will become relatively less hawkish, especially given that the governor casts a second vote in case of a tie,” said Nomura Research in a December 12 note.
According to UBS Securities Ltd, the central government’s policies may turn more populist after the state election results. UBS Securities also believes Das may be able to handle the working relationship between the RBI and the government better. “Considering the monetary policy is decided by MPC, we would expect policy continuity. His views on surplus reserves and the role of RBI board merit tracking,” analyst Gautam Chhaochharia and economist Tanvee Gupta Jain, UBS Securities India, said in a note on December 12.
According to Morgan Stanley, odds are in favour of equities. Equity strategists Ridham Desai and Sheela Rathi said in a report on December 12 that sentiment is more likely to improve from post-crisis lows. “The political cycle (measured as policy certainty) is likely to turn down,
THE 10-YEAR BOND YIELD FELL AS MUCH AS 11 BPS TO HIT A FRESH 8MONTH LOW, CLOSING AT 7.41% FROM PREVIOUS CLOSE OF 7.52%
growth is likely to move higher, credit growth seems to be at the beginning of a new cycle, terms of trade are improving, rates are probably taking a brief pause before continuing to head higher, profit margins appear to be at the start of a new upcycle, valuations are bang in the middle of the historical range and could go either way depending on other factors.”
However, brokerage firm CLSA was cautious on domestic inflows, and said markets may be impacted as state election results will likely increase the fears of an unstable government among retail investors. “Our analysis of state election manifestos highlights competitive populism by the Bharatiya Janata Party (BJP) and the Congress with farm loan waivers, unemployment grants and farmer handouts. This is good for consumption, but bad for a capex cycle recovery.”
This year, domestic liquidity has been robust, supporting the markets in absence of significant foreign inflows. According to Bloomberg, domestic institutional investors (DIIs), including mutual funds and insurance companies, have bought Indian shares worth ₹1.10 lakh crore while foreign institutional investors (FIIs) were net sellers of Indian equities amounting to $4.46 billion.
The 10-year bond yield fell as much as 11 basis points to hit a fresh eight-month low, closing at 7.41% from its previous close of 7.52%. The rupee ended at 72.02 to a dollar, down 0.21% from its previous close of 71.87. Bond yields and prices move in opposite directions.