Markets climbed to a four-month high on Wednesday, the eve of the Reserve Bank of India’s (RBI) monetary policy statement. The Nifty touched the 11,000-mark for first time since 1 October 2018, after hitting a record 11,760 on 28 August.

The 50-share index closed at 11,062.45, up 128.10 points or 1.17%, while the Sensex was at 36,975.23, up 358.42 points or 0.98% before briefly touching the 37,000-mark.

Investors are expecting RBI governor Shaktikanta Das, in his maiden monetary policy review, to change the policy stance to neutral and keep interest rates unchanged. The RBI’s Monetary Policy Committee, or MPC, began its policy review meeting on Tuesday, just days after the government announced a range of election-year sops in its interim budget presented on 1 February. General elections are due in April-May.

According to Ajay Bodke, chief executive and chief portfolio manager at brokerage firm Prabhudas Lilladher Pvt. Ltd, markets are hopeful that the combination of a new governor at the helm, benign inflation prints and stability on the external front may persuade the MPC to change its monetary stance to neutral and possibly lower the repo rate by at least 25 basis points (bps).

However, Bodke is concerned that the market rally is not broad-based and that the surge is only due to buying in a handful of stocks. On Wednesday, 1,008 shares advanced against a decline in 1,563 shares on the BSE, suggesting not all stocks have participated in driving the markets higher.

“The market participants would be cheerful if the rally were broad-based and not confined to select names," Bodke added.


Analysts believe the MPC in its sixth bi-monthly policy statement may be cautious on the inflationary impact of the interim budget and may raise concerns on the quality of expenditure, especially when borrowings have increased significantly. In the interim budget, there was a marginal slippage in the 2018-19 and 2019-20 fiscal deficit targets, resulting in a sharp increase in the borrowing quantum. The government missed its 2018-19 fiscal deficit target of 3.3% of GDP and instead pegged it at 3.4%. It also budgeted the 2019-20 fiscal deficit target at 3.4% of GDP, against a glide path target of 3.1%.

“We note that the fiscal deficit slippage is only part of the story. While the borrowings used to finance current expenditure have increased only marginally in FY2020, the bigger concern is crowding out private investment due to on-budget and off-budget borrowings. Aggressive public sector borrowings risk impeding monetary policy transmission as well. Given the increasing dominance of off-balance sheet borrowings, consolidated public sector debt/borrowings should be assessed for comprehensive policy decisions," said Kotak Economic Research in a note on 5 February, expecting a repo cut of 25bps in April and June. One basis point is a hundredth of a percentage point.

However, Bank of America Merrill Lynch thinks the fiscal risks have been overdone.

“We are not particularly concerned that the Centre’s fiscal deficit is slightly above the fiscal path. In fact, fiscal deficit cuts have been nullified by a parallel tightening of liquidity. As a result, crowding out is rising. Despite lower fiscal deficits, this is keeping lending rates high," it said in a note on 4 February.

In the current fiscal year, the RBI has raised the policy repo rate twice by 25bps each. It changed the monetary policy stance from ‘neutral’ to ‘calibrated tightening’ in the October policy review. 

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