India's leading stock indices jumped 2.5% on Wednesday to take shares to 28-month highs after Reserve Bank of India (RBI) governor D Subbarao gave a clear indication that interest rates might dip further, strengthening a spirit already buoyed by a global rally in stocks.
The benchmark Sensex of the Bombay Stock Exchange vaulted 491 points to 20,213 points, helped by bank, real estate and automobile stocks whose profits revolve around the interest rate regime that saw its first benign signals in 30 months this week with headline inflation heading towards levels that the central bank finds comfortable.
The RBI is due to meet on June 17 to discuss rates, and Subbarao said in Frankfurt that he would take note of the new inflation levels.
“We certainly will take note of the softening of inflation and the external payments situation in the next mid-quarter policy statement on June 17,” said Subbarao, adding, he was happy to see that inflation has come down to below 5%.
However, experts advised investors to be cautious and be selective in picking stocks and go for quality.
“Global as well as domestic factors have been at play. While globally, the market sentiment for equities has improved dramatically, the strength of the rally took everyone by surprise,” said Sanjeev Zarbade, vice-president, research, at Kotak Securities.
The National Stock Exchange’s Nifty gained gained 151 points, or 2.5%, to close at 6,147 points.
“Retail investors can still enter the market and gain if they follow the stock approach instead of a market approach,” said Deven Choksey, chief executive officer, of KR Choksey Shares and Securities.
“There was aggressive buying in the market due to favourable macro factors. The US market is at a all time high while the Japanese market closed at over 4-year highs. In India, buoyed by WPI (wholesale price index) inflation at a 41-month low of 4.9%, 10-year government bond yields hit a three-year low below 7.5%. This resulted in a strong rally in rate sensitive sectors like banking (especially PSU banks), auto and realty, amidst broad-based buying in the market,” said Sachin Shah, fund manager at Emkay Investment Managers Ltd.
The WPI Inflation for April came in at below 5%, a level last seen in November 2009.
The BSE realty index rallied 4.04% while the banking index rose 3.95%, capital goods 3% and the auto index 2.29%.
Car and home loans drive demand for the automobile and realty industries. The cheaper loans are, the more the demand and profits for these industries.
Choksey said there was no major “genuine buying” on Wednesday — indicating speculators at work.
“From an investment perspective, we continue to recommend a bottoms-up approach and would recommend investors to accumulate stocks having reasonable valuations, strong balance sheets and ethical management across sectors,” said Zarbade.
“There is still time for retail investors who missed out the rally earlier to enter,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services. “The medium term outlook is positive and the Nifty may rise to the 6,215 level followed by a correction thereafter.”