Mumbai: The first statements on the Indian economy from finance minister Pranab Mukherjee and his senior officials brought conflicting responses from the equity and bond markets on Wednesday—shares soared and bonds tumbled.
Equity buyers took comfort from hints on more public spending on inrastructure and lower interest rates, while bond traders feared that a further rise in bond issuance by the government to fund its fiscal deficit would push up interest rates.
The Bombay Stock Exchange’s (BSE) Sensex gained 520.41 points, or 3.83%, to end at 14,109.64. The National Stock Exchange’s Nifty rose 3.87%, to close at 4,276.05.
Meanwhile, Asian markets jumped up on news that the US Conference Board’s consumer confidence index rose to 54.9 for April, from 40.8 the previous month. Hong Kong’s Hang Seng Index gained 5.26%, while Singapore’s Strait Times index improved 3%.
“The government made some right noises about reforms,” said Prateek Agrawal, head of equities at Bharti Axa Investment Managers Pvt. Ltd.
On Wednesday, in his first press conference after taking charge as finance minister, Mukherjee stressed on financial sector reform and the government’s intent to boost spending on infrastructure.
“Industry and business have been hurt by the cost of finance and its weak availability,” he told reporters. “The first step I propose to take is to meet bankers and to get them committed to a more benign plan of action.” Investors read this as a signal to banks to lend more and at cheaper interest rates.
Real estate, banking, infrastructure and state-owned company stocks lead the rally after Mukherjee’s statements. BSE’s realty index gained 6%, while banking sector stocks rose 5.4%. Public sector unit stocks collectively rose 4.7% on hopes the government will sell stakes in these units to raise revenue to fund a fiscal deficit of the Centre and states that is close to 11 % of the gross domestic product.
“Real estate valuations were closest to bankruptcy levels,” said Sameer Narayan, head of equities at Fortis Investment Management (India) Pvt. Ltd. “When capital becomes easily available, these stocks gain.”
Confidence returned to the sector after some realtors such as Unitech Ltd and Indiabulls Real Estate Ltd successfully raised money through qualified institutional placements (QIPs). QIPs are private placement of shares, or securities convertible into stock, by a listed company to qualified institutional buyers such as banks, insurance firms, mutual funds and foreign institutional investors.
“A lot of people are not fully invested,” said Devesh Kumar, managing director of Centrum Broking Pvt. Ltd, a local brokerage firm. “Whenever there is a corrections—as happened in the past two days—buying happens.”
On Tuesday, the Sensex had slid by 2.33% on news that the government will have to borrow more to boost growth.
But the yield on the benchmark 10-year bond spiked after finance secretary Ashok Chawla told reporters in New Delhi that the government may borrow more in the first half of the year than its scheduled Rs2.41 trillion. The plan for the full year remains intact at Rs3.08 trillion, but the government may revisit the target in its budget, Chawla said.
The government has already raised two weekly borrowing to Rs15,000 crore, from Rs12,000 earlier. However, it was not clear if the increased borrowing is within the existing limit or an addition to the first-half borrowing.
The front loading of the borrowing programme disappointed the bond market, which is already reeling under the pressure of oversupply of government bonds. The yield on the 10-year bond closed at 6.63% after touching an intraday high of 6.69%, down from its Tuesday close of 6.56%.
Reuters, Bloomberg, Ashwin Ramarathinam and Anup Roy contributed to this story.