In the stock market’s best day-after-budget showing, both the Sensex and the Nifty surged by over 3% on Tuesday, riding on hopes of an out-of-turn interest rate cut by the Reserve Bank of India (RBI) kindled by the announcement of fiscal steps.
The Sensex rose 777 points, or 3.4%, to close at 23,779.35, while the NSE Nifty gained 235.25 points, or 3.4%, to 7,222.30. Both indices recorded their biggest single-day gains in more than two years. The rally added Rs 2.52 lakh crore to investor wealth.
Tracking equities, the rupee also logged this year’s biggest single-day gain of 57 paise to close at a nearly three-week high of 67.85 against the US dollar.
The RBI is scheduled to hold its next policy review in April.
“The Union Budget, contrary to market expectations, seemed far more prudent and credible given the achievement on the fiscal front and the arithmetic on revenue assumptions, which appear quite realistic,” an official of Centrum Broking said.
While announcing the budget proposals on Monday, finance minister Arun Jaitley maintained the fiscal deficit target for 2016-17 at 3.5% of GDP. This has fuelled hopes that the RBI will slash interest rates soon.
Fiscal deficit is the measure of the amount of money the government borrows to fund its expenses.
“The government showed admirable restraint by sticking to the fiscal consolidation path. This is a huge leg-up for macro-stability. Additionally, it leaves space for further RBI easing and is supportive of the rupee and bond yields,” said Pranjul Bhandari, chief economist, India, HSBC Securities and Capital Markets.
In its monetary policy meeting on February 2, RBI governor Raghuram Rajan had said the central bank would maintain an accommodative stance, and structural reforms in the budget, which boost growth while controlling spending, could create more room for monetary policy to support growth.
Analysts felt a rate cut to the tune of 25-50 basis points could come as early as Wednesday.
On Tuesday, 27 of the 30 Sensex stocks ended with gains, led by ITC (up 9.9%), after analysts said the 10% increase in excise duty on tobacco products proposed in the budget was lower than announcements in the previous two budgets. Other Sensex gainers included Maruti Suzuki (up 8%), ICICI Bank (up 8%) and Hero MotoCorp (up 6%).
A rally in global markets, led by China reducing cash reserve requirements by 50 basis points late on Monday, also boosted sentiment.