Aday after one finance company warned that the US Federal Reserve’s decision on Tuesday to cut the federal interest rate by 50 basis points could result in an investment bubble in emerging markets, the Sensex, the benchmark index of the Bombay Stock Exchange rose over 653 points to close at 16323, its highest ever.
The broader 50-stock index of the National Stock Exchange also rose, by over 186 points to end at an all-time high of 4,732, but it was the Sensex that was the biggest gainer across global markets. Among emerging market indices, the representative index of the Shanghai Stock Exchange was the only one to fall on Wednesday, by 0.5%. All other indices gained between 1% and 4%. The Sensex gained 4.2%.
The immediate trigger for the rally on all markets was the Fed’s decision. Some analysts had predicted a 50 basis points cut in interest rates, but there was always the chance that the Fed would play safe and go for a 25 basis points reduction.
On Tuesday, following the Federal Reserve’s decision, the Dow Jones Industrial Average, the key US index, closed at 13,739, up 336 points or 2.5%. On Wednesday, the Dow was up another 90 points or 0.65%, at 9.15pm India time.
The Federal Reserve announced a half a percentage point cut in its interest rates on federal funds, the first in four years, easing the borrowing cost for banks in US that are now expected to cut their prime lending rate. This boosted the spirit of global investors worried over tightened credit in the wake of the subprime crisis in the US.
The Sensex’s first brush with 16,000 comes at a time when finance firm Merrill Lynch has warned that the Fed’s action has increased the risk of an investment bubble in emerging markets (EM). “It is essentially 1998 in reverse; the credit problem is now in the US rather than EM. Liquidity to ease the US credit problem will be redirected towards EM just as liquidity to ease the Asia/Russia problem was redirected towards technology (stocks),” the firm said in a trading note to its clients.
Bond markets around the world remained cautious, said Suyash Choudhary, a fund manager with Standard Chartered Asset Management in India. Worries about the exact fallout of the Fed’s action may have something to do with it.
The Reserve Bank of India (RBI) may be under pressure to intervene in the forex market to prevent the appreciation of the rupee beyond its comfort zone, said Kaushal Sampat, chief operating officer of Dun & Bradstreet in India. “The widened interest rate differential between India and the US could result in a further surge of capital inflows, leading to the appreciation of the Indian currency. RBI could consider a cut in interest rates, given the recent dip in the growth rate of industrial production and with the inflation being at a 17-month low,” Sampat said.
The Fed’s policy represents a departure from the traditional approach of responding to backward-looking data more than forward-looking data, said Ritesh Jain, a debt fund manager with Principal PNB Asset Management Co. Pvt. Ltd.
Sandeep Nanda, executive vice-president, research, Sharekhan Ltd, said he expects RBI to be under greater pressure to cut interest rates. He added that sectors such as banks, autos and metals that are cyclical and interest rate sensitive, would perform well in the future.
The real estate sector was the biggest gainer on BSE. DLF Ltd, the real estate major, was the top traded counter on BSE with shares worth Rs255.19 crore changing hands. Reliance Industries Ltd (RIL) and ICICI Bank Ltd recorded a turnover of about Rs226 crore each. The market capitalization of RIL, the largest weighted stock in Sensex, crossed Rs3 trillion for the first time.
Oil and Natural Gas Corp. and Reliance Energy, the two energy-related stocks in the Sensex, gained significantly as crude oil prices topped a record $82 (Rs3,304.6) per barrel in Wednesday’s trade, with the Fed’s rate cut heralding a possible recovery in the economy and higher demand for energy.
All 30 stocks that constitute the Sensex registered gains, with Housing Development Finance Corp. Ltd and HDFC Bank Ltd, up about 8% each, gaining the most.
Other major gainers include Bharti Airtel Ltd and RIL—both the stocks added well over 5%.
Ashwin Ramarathinam contributed to this story.