Mumbai: Markets surged over 1% on Tuesday, aided by better-than-expected domestic macro data and supportive global cues. A day after moderate December retail inflation data stoked hopes of an RBI interest rate cut in February, the Sensex ended at 36,318.33 on Tuesday, up 464.77 points, or 1.30%, while the Nifty was at 10,886.80, up 149.20 points, or 1.3%.

Abhijeet Dey, senior fund manager (equities) at BNP Paribas Mutual Fund, said: “Stock markets in India witnessed a sharp surge as benign inflation numbers at home and stimulus measures in China spurred interest in equities and encouraged investors to participate in the markets. Asian stocks were higher after China signalled more stimulus measures to soften the blow from an ongoing tariff war with the United States."

China promised more measures to help support its slowing economy, sparking a rally in Asian markets, led by Hong Kong and Shenzhen. South Korea, Singapore and Taiwan also posted solid gains, and Japan reopened in positive territory after a holiday. The benchmark MSCI Asia Pacific Index advanced as much as 1.1% to hit a six-week high. Beijing will keep lowering taxes, especially for small businesses and the manufacturing sector, said a statement distributed to reporters before a press conference with officials from the People’s Bank of China, ministry of finance and others.

India’s retail inflation moderated to an 18-month low of 2.2% in December from 2.3% in the previous month, primarily due to deepening food deflation and lower oil prices. Bank of America Merrill Lynch expects RBI to cut its repo rate by at least 25 basis points (bps) on 7 February when its rate-setting monetary policy committee meets. “In our view, it is better to act in February rather than April as the ‘busy’ industrial season ends in March," it said.

One basis point equals one-hundredth of a percentage point.

According to Nomura, even though inflation is set to sequentially rise in the coming months, an expected undershoot of inflation and growth projections by RBI makes its “calibrated tightening" stance increasingly incongruous. “We expect RBI to change its stance back to ‘neutral’ at the February or the April policy meeting and follow up with a 25 basis points rate cut in Q3," it said in a note on 14 January.

“There is a curious dichotomy afoot in core inflation dynamics. On the one hand, retail prices of petrol and diesel have sharply come down, and the slowdown in domestic demand is gradually visible in moderate momentum in a number of key categories… On the other hand, sharp idiosyncratic uptick in health and education costs beggars belief," Nomura added.

The 10-year government bond yield jumped as traders remained cautious over ‘puzzling’ retail inflation data. The yield on 7.17% of 2028 bond ended at 7.48%, up 5 basis points from Monday’s close of 7.43% while the yield on 7.26% of 2029 bond closed at 7.253%, compared to its previous close of 7.224%.

Bond yields and prices move in opposite directions.

The rupee ended at 71.02 to the dollar, down 0.13% from previous close of 70.93. The home currency opened at 70.75 a dollar and touched a low of 71.15. The currency followed losses in its Asian peers ahead of the UK parliament’s vote on the Brexit deal.

Following a dismal 2018, foreign institutional investors (FII) continue to sell Indian equities. In January so far, FIIs have sold Indian shares worth $326.90 million while domestic institutional investors (DII)—including mutual funds and insurance companies—have been net buyers of Indian shares worth 1,849.03 crore.

Bloomberg contributed to this story.

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