Riding on the coat-tail of a global markets rally, Indian equities bounced back on Wednesday, while benign retail inflation in July stoked hopes of further interest rate cuts by the Reserve Bank of India. The Sensex ended at 37,311.53, up 353.37 points, or 0.96%, while the 50-share index Nifty was at 11,029, up 103.55 points, or 0.95%.
Stocks markets in China, Japan and Korea rose up to 0.98% as the US announced delayed implementation of tariffs on Chinese goods.
Analysts said moderation in inflation and positive developments in the US-China trade war boosted market sentiments. “The Indian markets are expecting another rate cut and supportive actions by the government. Any delay in measures can have adverse impact," said an analyst.
Retail inflation eased marginally in July to 3.15%, 3 basis points (bps) lower than June, aided by the moderation in the price rise of food items and lower fuel prices. This was well below Reserve Bank of India’s inflation target of 4%.
Economists at Kotak Economic Research said that there could be another 25-50 bps rate cut in financial year 2020. “Even though core inflation surprised on the upside, it is unlikely to sustain this momentum on the back of weak growth impulses. In this context, monetary policy committee’s (MPC’s) acknowledgement to consider growth as the highest priority strengthens our belief of another 25-50 bps cut through the rest of FY2020. Impact of skewed rainfall distribution and geopolitical developments remain key risks," wrote economists at Kotak in a note on Tuesday.
Others concurred. Rahul Gupta, currency research head, Emkay Global Financial Services Ltd, said despite four rate cuts by the RBI, food inflation is still subdued mainly because of a better monsoon. “The drop in retail and wholesale inflation clearly states that the 110 bps rate cut transmission is still not observed, keeping room open for one more rate cut in the future. If not a rate cut, then the RBI may force banks to reduce their MCLR in order to revive consumer demand."
Meanwhile, India VIX index, the so-called fear index, fell 7.99%, the most in this month to close at 16.35 on Wednesday. The volatility index typically has an inverse correlation with the benchmark indices.
VIX is the investors’s perception of the market’s volatility in the near-term. The low number indicates that investors are not expecting any major correction at least over the next month. In this month so far, the Sensex and Nifty have fallen 0.5-0.8% after a sharp correction of nearly 5% in July.
According to Sahaj Agrawal, head of derivatives, Kotak Securities, further consolidation is expected during the month. “Nifty continues to consolidate in the range of 10,800-11,200; further consolidation expected for the remaining of the August series. Metal stocks have shown some early signs of reversal–further momentum will confirm reversal of the same," he said.
(Bloomberg contributed to the story)