[News] Markets rally as central bank keeps hopes of a rebound alive

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Markets rally as central bank keeps hopes of a rebound alive

The Reserve Bank of India’s (RBI’s) decision to enhance liquidity and revive growth in its monetary policy review drove equities higher on Friday. The renewed talk of another round of US stimulus also helped global markets rise. The BSE Sensex ended at 40,509.49, gaining 326.82 points or 0.81%. The Nifty closed at 11,914.20, adding 79.60 points or 0.67%.

India government bond prices rallied after RBI said it will double the purchase size of open market operations (OMOs) and also use it for state bonds. The 10-year bond yield fell 8 basis points (bps) to 5.937%, a level that was last seen on 4 September. Bond yields and prices move in opposite directions.

The government bond auction on Friday saw the cut off yield at 5.94% on the 10-year g-sec paper. Bids of ₹13,000 crore were received in the auction. Earlier, RBI had declined to accept bids at government bond auctions on four consecutive occasions as it fought to cool the benchmark yields, which had crossed 6%.

Analysts cheered RBI’s announcement of key measures to ensure non-disruptive financing of the fiscal deficit and sent a “whatever it takes" signal to the bond market.

Shares of banks and financial service companies led the rally in the stock markets on Friday, following the central bank’s announcements of on-tap targeted long term repo operations and OMOs, which will help maintain a good level of funds at cheap rates from RBI to the industry. Furthermore, rationalization of risk weights for home loans are expected to help banks and non-bank lenders reduce provisions and enhance operational flexibility.

RBI’s dovish intent through a combination of clear, dovish forward guidance, liquidity commitments, and bond-supportive measures will ensure broad-based policy transmission, despite unchanged policy rates, according to Nomura. It expects a cumulative 50 bps policy rate cuts, distributed across the December and February policy meetings.

However, positive growth expectations by the March 2021 quarter are a bit optimistic, said Tanvee Gupta Jain, economist, UBS Securities India Pvt. Ltd. “While the rural economy is recovering faster and supply-side constraints are easing, the turnaround in urban demand will likely be gradual," Gupta said.

The markets will keep a close watch on how the September quarter corporate earnings pan out, while the US stimulus package is expected to usher in more foreign money into Indian equities. Meanwhile, the Indian rupee touched a one-month high of 73.03, before closing at 73.15 at the end of the day, up 0.13% against the dollar.