Likely Fed rate cut buoys market mood

Likely Fed rate cut buoys market mood

Mumbai: Investors on Dalal Street are betting that the US Federal Reserve (Fed) will announce a further cut in interest rates when it meets this week, and have started accumulating some stocks because such a reduction could have a positive impact on the market.

“Some of the domestic institutional investors such as mutual funds and insurance companies expect a strong rally in the wake of a Fed rate cut," says Anita Gandhi, head of institutional business at Arihant Capital Markets Ltd, an institutional brokerage.

The company claims that large institutional investors are buying select stocks in anticipation of this. Gandhi adds that some undervalued stocks and sectors represented in the Sensex, the 30-stock benchmark index of the Bombay Stock Exchange, will lead the surge.

Gandhi isn’t the only one who thinks the market is due for another sharp rise. “The Sensex should break above 21,000 in January," says Rakesh Mehta, chairman of Mehta Equities Ltd, a domestic brokerage.

Apart from the Fed rate cut which, if it happens, will ensure more liquidity, Mehta is betting on new fund allocations in the Indian market beginning January to contribute to the rise. “Many India-focused billion-dollar funds are in the pipeline," he adds.

The Federal Open Markets Committee (FOMC), the policy making body of the Fed, is meeting on Tuesday. If it goes for a 25 basis points (0.25 percentage points) rate cut, bringing down the policy rate to 4.25%, the Sensex could race ahead, say brokers and analysts.

The index had added 1.85% since the beginning of December and closed at 19,966 points on Friday.

Since September, the Fed has cut its policy rate 75 basis points in two stages to 4.5%. “Unlike in the past many years, the rise of Sensex has been slow this December. If the Fed cuts rate by 25 basis points, it could be a breaking point for the index to start a strong rally," says V.R. Srinivasan, chief executive of Brics Securities, a domestic brokerage.

And some analysts do not rule out a sharper 50 basis points cut by the Fed, triggering an even sharper rise in the Sensex.

Analysts say a rate cut by the Fed will drive liquidity into emerging markets, including India. “The liquidity provided by a Fed rate change is a very important factor for the Indian equity market," says Nilesh Jasani, the head of equity research for Credit Suisse in India. “We are expecting a 25 basis points cut from Fed. This will be positive trigger for the Indian market. There could be another 100 basis points cuts by the Fed in the next one year," he adds.

The Sensex reached its lifetime high of 20,238.16 on 30 October, a week after capital market regulator the Securities and Exchange Board of India, or Sebi, introduced steps to curb flow of money into the country through offshore investment instruments such as participatory notes (PN), popular with foreign institutional investors (FIIs). The benchmark index then lost over 3,000 points to touch a low of 17,171.45 on 22 October but a fresh rally, in anticipation of a further rate cut by the Fed, took it close to 20,000 last week.

“In the previous run up to the 20,000 level, only a few large stocks were moving the Sensex," says Srinivasan. “However, after the 3,000 points correction in October, there is greater participation among the 30 stocks that constitute the index. Also, there is good movement in mid-cap and small-cap stocks. All these indicate a positive market outlook for the next few weeks," he adds.

FII investments in 2007 touched a record $17.98 billion till mid-October (about Rs70,805 crore then) before Sebi’s curbs on PNs. FIIs then sold over $2.14 billion worth of Indian stocks till the end of November. However, the trend have been reversed this month. In the first week of December, FIIs bought $872 million worth of Indian stocks. Currently, FII investments for the year stand at $16.7 billion, the highest since the market was opened up for foreign investments.

There have been 75 new FII registrations since mid-October, taking the total number of FIIs operating in the Indian market to 1,185.

“We are quite bullish on the markets at this level," says Shankar Sharma, who owns Mumbai-based brokerage First Global Securities Pvt. Ltd. According to him, even if the market does not see large inflows, the index could see steady growth if the sentiment on global markets is positive.

“FIIs have not been large buyers in December," says Srinivasan. “However, if we look at the overall picture, they have not been into huge selling (of equities either). In today’s market, as long as FIIs do not place big sell orders, domestic funds will provide strength (to the market), taking the index up," he adds.

Domestic institutional investors have bought equities worth Rs3,637 crore since 17 October.

Ashwin Ramarathinam contributed to this story.