RBI’s surprise move boosts markets amid global woes | Mint

RBI’s surprise move boosts markets amid global woes

Domestic institutional investors booked profits worth  ₹997.08 crore, even as foreign portfolio investors bought a provisional  ₹475.81 crore. (Mint)
Domestic institutional investors booked profits worth 997.08 crore, even as foreign portfolio investors bought a provisional 475.81 crore. (Mint)

Summary

MPC’s decision resulted in bond yields dropping and the rupee strengthening

NEW DELHI : Indian stocks and bonds got a boost on Thursday as the Reserve Bank of India (RBI) unexpectedly chose to keep policy rates unchanged at 6.5%, with benchmark indices Sensex and Nifty closing higher for the fifth consecutive session despite mixed global markets.

The RBI monetary policy committee (MPC) decision resulted in bond yields dropping and the rupee strengthening. Domestic institutional investors booked profits worth 997.08 crore, even as foreign portfolio investors bought a provisional 475.81 crore.

MPC took into account the ongoing global economic turmoil, the banking crisis, and its potential impact on India’s growth-inflation dynamic in FY24.

Graphic: Mint
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Graphic: Mint

“After raising the repo rate by 250 basis points, RBI seems to have adopted a wait-and-watch approach. Equity and bond markets could justifiably get excited as a knee-jerk reaction as growth and inflation headwinds seem less severe than earlier feared going by the RBI MPC’s latest move and estimates," said Dhiraj Relli, managing director and CEO of HDFC Securities.

A positive is that experts anticipate that interest rates will pause going forward.

Additionally, RBI maintained its FY24 GDP projection at 6.5%, signalling that the economy’s core strength remains intact, which is another positive, analysts said. At 5.2%, inflation is projected to be slightly lower.

Sujan Hajra, chief economist and executive director of Anand Rathi Shares and Stock Brokers, said, “Unless there was a big surprise either on inflation or growth, we expect the RBI to remain in pause mode during 2023."

Bond market investors, who were expecting a 25 basis-point hike in policy rates following the surge in headline inflation in January and February, as well as sticky core inflation, were surprised by the unanimous decision to pause.

The 10-year government bond yield reached a low of 7.19% before settling at 7.22% from its pre-policy level of 7.28%. As a result, Edelweiss Mutual Fund analysts said, overnight index swap (OIS) levels have declined even further because market participants were not positioned for pause. OIS is an interest-rate derivative contract.

The recent fall in US treasury yields has also improved bond market sentiment.

Edelweiss Mutual Fund expects the sovereign yield curve to steepen gradually as market participants unwind the expected rate hike at the short end. Long-end of the yield curve (15-year plus) is expected to under-perform relatively amid higher fresh supply in H1FY24 and a potential decline in demand amid recent changes in tax laws.

They prefer a 5- to 10-year segment of the yield curve for its liquidity and relative value at current levels.

Churchil Bhatt, executive vice president and debt fund manager at Kotak Mahindra Life Insurance Co., believes that the ongoing steepening trend in sovereign yield curves will be reinforced.

In the near term, he expects the 10-year G-Sec to trade between 7.10% and 7.40%.

According to Jateen Trivedi, an analyst at LKP Securities, the rupee strengthened by 10 paise to 81.90 to the dollar on Thursday. In the last three days, the rupee traded above 81.95, up about 0.50%, amid strong remarks from the RBI governor about being firm in strengthening the rupee. The expansion of NDF (non-deliverable forex derivative contracts) access will also help manage the volatility of the rupee.

This, according to Trivedi, will improve price discovery in India along with offshore volumes here and better opportunities for residents to hedge their books.

The dollar index, however, at 101.60 and Brent crude trading above $80 kept gains for the rupee under check.

The gains in the indices were led by the interest-sensitive realty sector, and the index saw gains of more than 2%, while Financials and Automobile also saw good gains of more than 0.9%.

The IT stocks saw major selling pressure as recession concerns weighed.

The fear gauge, India Vix, closed at a 20-month low of 11.8.

This is also way below the average of 14.8 in the concluded March quarter. Analysts like Siddhartha Khemka, vice president head of research retail at Motilal Oswal, said this indicates a “very indecisive" market with no significant upside or downside triggers.

“Nifty could consolidate around the current levels while Bank Nifty could see a bump up given that it has underperformed," Khemka said.

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