Indian assets kicked off the month on the front foot, bucking the weakness in Asian equities as a slowing economy, U.S. trade tariffs and a slump in oil prices spurred speculation that the central bank would cut rates later this week.
The S&P BSE Sensex gauge of stocks jumped 1.4% to close above the record 40,000 for the first time, led by beaten-down automakers. The rupee rallied to a one-month high and benchmark bond yields slid to an 18-month low after data late Friday showed gross domestic product rose last quarter at a slower pace than economists expected.
Indian assets are extending gains after the Sensex capped its third monthly increase in May and benchmark yield posted its biggest monthly loss since November 2016. The rally has come amid a slide in global yields sparked by an escalating U.S.-China trade war and a sweeping election victory for Prime Minister Narendra Modi, which last week led to $1.5 billion of foreign inflows into local shares and debt.
While the U.S. said Friday it would impose tariffs on previously duty-free Indian products, a slump in the price of oil lowers the import bill of the fastest-growing energy consumer and improves the outlook for inflation, which is already below the central bank’s target.
“A crash in crude oil prices, a stronger rupee are all favorable tailwinds driving the market higher," said Gaurang Shah, chief investment strategist at Geojit Financial Services Ltd. in Mumbai. “My wild expectation will be a 50-basis point rate cut" at the RBI’s policy review Thursday, he said.
Still, trade tensions and domestic economic challenges will limit further upside for equities, said Jitendra Panda, managing director at Peerless Securities Ltd. in Kolkata. Liquidity has dried up in recent months as demand for cash picked up ahead of six-week general election, putting a lid on investment and consumption.
“Slowing economic growth and lower auto sales remain in focus and investors await the government’s plan to deal with these challenges," he said.
- All 19 sector sub-indexes advanced led by automakers. The S&P BSE Auto Index jumped 1.9%, paring its year-to-date loss to 10%.
- Reliance Industries contributed the most to the index advance, increasing 2.3%. Hero MotoCorp had the largest gain, rising 6%.
- ICICI Bank was the biggest drag on the index and had the biggest drop, declining 0.2%.