Indian shares rose to their highest close in nearly two weeks on Tuesday after the central bank surprised with a bigger-than-expected 50 basis points cut in its policy rate, but the cheer was tempered by the cautious outlook on further rate cuts. Rate sensitive stocks like banks, autos and realty led the gains, all of whom have seen demand waning on account of high interest rates in a hiking cycle which began in March 2010.
"The overall headroom for interest rates to come down is likely to be a moderate 75-100 basis points over the course of the year, which itself is a major positive for the overall corporate earnings growth outlook, especially for rate sensitives such as banks and infrastructure," said Dinesh Thakkar, chairman and managing director at Angel Broking.
The country's main 30-share BSE index ended up 1.2 percent at 17,357.94 points, its highest close since April 4. The broader 50-share NSE index rose 1.22 percent at 5,289.70 points. Gains would have been higher, but for the central bank's cautious view that there was limited scope for more rate cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly.
"It appears to be front ending of rate cuts by RBI, so markets would remain positive in near term. The next event to determine the market direction is whether government would raise fuel prices or not," said S. Naren, chief investment officer, equity, at ICICI Prudential AMC, who oversees $3.5 billion dollars in Indian equities. NSE Bank Nifty, the main banking index, ended 0.83 percent higher after the rate decision. It was trading 0.78 percent down ahead of the announcement.
Dealers expect the rate cut to help banks improve net interest margins and help reduce their bad loan possibilities. Shares in State Bank of India ended 1.73 percent up at 2,304.30 rupees. Private lender ICICI Bank was 1.36 percent higher at 885.45 rupees. Oil and Natural Gas Corporation gained 3.84 percent on hopes that prices of subsidised fuels would be revised upwards after the RBI urged the government to raise prices to ensure macroeconomic stability. Domestic mutual funds have been buyers in the stock for the January-March quarter, an Edelweiss Capital report said, which provided further fillip.
DLF shares closed 2.94 percent higher and Housing Development and Infrastructure ended 4.1 percent up. Engineering and construction company Larsen and Toubro rose 2.4 percent while smaller infrastructure stocks Punj Lloyd and IRB Infrastructure rose 2.8 percent and 4 percent respectively. Two-wheeler makers also rose with Hero Motocorp up 2.72 percent and Bajaj Auto gaining 1.4 percent.