Mumbai: India’s bellwether stock index, the Bombay Stock Exchange’s (BSE) Sensex, soared towards the psychologically important 10,000 mark on Friday, powered by pent-up energy from traders who missed Thursday’s strong rally in Asian markets because Indian markets were closed on account of Bhai Dooj, a Hindu festival.
The Sensex closed at 9,788, adding 8.22% or 743 points, but analysts said the rally will last if only the central bank steps in with aggressive support by cutting rates and releasing money into the system.
After the recent spate of rate cuts by central banks across the globe, led by the US Federal Reserve, many more central banks are expected to announce rate cuts next week. This could see at least some of the funds parked in safe and liquid US treasury bonds coming back to Asian equity markets, according to global analysts. The allocation of such capital will favour those Asian markets where central banks are more focused on growth, these analysts add.
Also See Fluctuating Trend (Graphic)
Local brokerages and fund managers are hoping to see some support action by the Reserve Bank of India (RBI) in terms of a cut in its policy rate as well as cash reserve ratio (CRR) or the portion of deposits that commercial banks are required to keep with RBI. This expectation has increased with the overnight call money market rate shooting up sharply to at least 20% on Friday. The liquidity crunch in the financial system was evident as banks stashed cash ahead of a Rs10,000 crore government bond sale. RBI had earlier cancelled two bond auctions to stop draining liquidity.
Apart from cutting its policy rate by 100 basis points, RBI slashed CRR by 250 basis points, releasing Rs1 trillion into the system, after overnight rates soared to 23% in the second week of October.
The National Stock Exchange’s broader 50-stock Nifty index gained about 188 points or 7% to close at 2,885. The rupee also rose on Friday’s trade to 49.4 against the dollar, on expectations of some foreign funds buying local stocks.
According to the provisional data of BSE, foreign institutional investors (FIIs) were net buyers of Rs1,237.21 crore as of today. So far this year, FIIs have pulled out $12.78 billion (Rs63,005 crore) from Indian equities after pumping $17.36 billion in 2007.
US equities rallied on Thursday as credit worries eased, the economy shrank slower than expected and Exxon Mobil Corp. registered record quarterly profits. Earlier in the day, the US Fed’s rate cut and new credit swap lines with some Asian and South American economies drove up Asian markets. On Friday, the Dow Jones Industrial Average opened flat at 9,179.09 and was trading at 9,181.64 at 8.15 pm India time.
Central banks in China, Hong Kong and Taiwan took their cue from the US Fed and cut interest rates. On Friday, Asia’s largest economy slashed a key interest rate by 20 basis points but the Bank of Japan’s measure fell short of market expectations, resulting in a 5% slump in the Nikkei. Other key markets such as China and Hong Kong also fell on Friday.
Institutional investors and analysts are now expecting rate cuts in other regions and an announcement from the European Central Bank.
Standard and Poor’s (S&P) Ratings Services’ affirmation of India’s long-term and short-term sovereign credit rating with a stable outlook on the former also contributed to Friday’s rally. The ratings reflect the country’s strong economic growth prospects and its deep government debt market, which helps accommodate its weak fiscal position. “India’s economic prospects remain strong with growth likely to average more than 7% in the medium term,” said S&P’s credit analyst Takahira Ogawa. “Underpinning that growth is the gradual deregulation of the industrial sector, continued trade liberalization, a dynamic service sector, and modest improvements in infrastructure.”
“There is the potential positive news stemming from further coordinated interest rate cuts,” said Christopher Wood, chief strategist of CLSA Asia-Pacific Markets, in his research report on Thursday.
With some Asian central banks taking an aggressive stance to support growth in their markets by cutting interest rates to combat deflation that is threatening the global financial system, institutional investors in Asia are allocating more capital to these markets.
Mark Mathews, Merrill Lynch’s Asia strategist, is going overweight on countries such as Hong Kong, Australia and China, and expects to see in these the “largest rate cuts between now and the end of next year”.
While many investors say that emerging markets equities are now witnessing irrational forced selling by Western investors scrambling to strengthen balance sheets and meet redemptions, according to Mathews, recent days have also revealed the soft underbelly of emerging markets, “with Iceland, Ukraine and Hungary going cap in hand to the IMF.”
Many emerging markets including Brazil, Russia, India and China (Bric) markets are expected to continue being vulnerable to strong foreign portfolio capital outflow.
“As recipients of large capital inflows in the past, the Brics are vulnerable to a capital pullback from developed countries,” said Thursday’s economic report by US-investment bank Goldman Sachs Group Inc.
According to the report, China is the least vulnerable of the four countries owing to strong external reserves, a relatively better bank deposits:loan ratio, and a currency that does not appear to be misaligned.
The vulnerability rankings of Asian countries by Merrill Lynch’s economics team indicates that currently India is the third most vulnerable in the region, next to South Korea and Indonesia.
Reuters contributed to this story.
Graphics by Ahmed Raza Khan / Mint