Unchanged rates have opened the gates for another rally

Indian bourses gained momentum as the RBI kept interest rates unchanged at its quarterly monetary policy review

Indian markets finally heaved a sigh of relief after massive selling by traders as the central bank kept key interest rates unchanged at the quarterly policy review. At the end of the day, the Sensex surged 51 points from the previous day’s close at 16,358 while the Nifty closed at 4,882, up 15 points.

At 12:00 hrs IST, the Sensex was trading at 16,064, down 243 points from the previous day’s close while the Nifty was trading down 61 points at 4,806.

However, at 14:00 hrs IST, the Sensex was trading down 68 points at 16,239 while the Nifty was trading at 4,847, down 20 points.

After the RBI kept interest rates unchanged, ICICI Bank shot up 7% while State Bank of India, HDFC, Axis Bank, HDFC Bank and Punjab National Bank were up around 2% each.

HEG Ltd was up 1% after the board of the company approved the expansion of the graphite electrode production capacity of the company from 66,000 TPA to 80,000 TPA.

Kirloskar Oil Engines has entered into a memorandum of understanding with Axial Vector Energy Corporation (AVEC) to explore the possibility of co-operation in the joint development of internal combustion engines by using AVEC’s technology and the marketing, engineering & manufacturing expertise of the company. The stock remained flat.

Shriram Transport Finance Company has allotted 116.58 lakh equity shares at a face value of Rs10 each to Qualified Institutional Buyers for an aggregate of Rs583.86 crore, resulting in a dilution of around 5.20%. The stock was down 1%.

ACC remained flat on reports that the company had acquired 100% equity in Encore Cement, which has a two lakh tonne capacity slag grinding unit.

Lupin Ltd’s US subsidiary Lupin Pharmaceuticals Inc has received final approval from the US Food and Drug Administration for its Perindopril Erbumine tablets. The stock was up 1%.

During trading hours, the Reserve Bank of India (RBI) at its quarterly monetary policy review hiked the cash reserve ratio (CRR) by 75 basis points in two stages to 5.75% to mop up excess liquidity from the banking system.

The first phase of 50 basis points of the CRR hike is effective from 13 February 2010 and the second stage is effective from 27 February 2010. The two-phased CRR hike will soak up Rs36,000 crore from the banking system. The CRR is the percentage of deposits which banks must keep with the central bank. However, the RBI kept the key policy rates—the repo rate, the reverse repo rate and the bank rate unchanged.

The RBI said in its third quarter review that though inflationary pressures in the domestic economy stem predominantly from the supply side, the consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process. The central bank lifted its wholesale price index inflation forecast for the end of the fiscal year in March 2010 to 8.5% from its earlier forecast of 6.5%, but said it expected inflation to moderate starting in July 2010, assuming a normal monsoon and global oil prices holding at current levels.

The RBI also lifted its forecast for GDP growth in the current year to 7.5%, from an earlier target of 6%, and said that the current rate of growth is likely to be sustained in the financial year that ends in March 2011.

As per reports, Ashok Chawla, finance secretary, said that the RBI has taken a balanced view on managing economic recovery and prices. He added that the CRR hike was appropriate and adequate, but said that interest rates are unlikely to go up after the RBI’s policy review. He agreed that food inflation was a matter of concern and added that economic growth was on track.

Meanwhile, as per reports, the RBI called on the government to get its fiscal house in order and said that monetary policy would be ineffective unless the government rolls back its borrowing, which is on track to hit a record Rs4.50 lakh crore ($96.90 billion) this fiscal year.

The RBI also said that it would continue to monitor macroeconomic conditions—particularly the price situation—closely and take further action as warranted. With regard to capital inflows, the central bank said that the inflows so far have been absorbed by the current account deficit. However, sharp increase in capital inflows, above the absorptive capacity of the economy, may complicate exchange rate and monetary management, it added.

As per media reports, D Subbarao, RBI governor, said that the interest rate rise would have had unpredictable impact on liquidity. He also added that it is important to absorb a predictable amount of liquidity before taking other steps.

During the day, Asia’s key benchmark indices in Hong Kong, Japan, China, South Korea, Singapore and Taiwan fell by between 0.16%-2.44% on concerns over the fiscal health of Greece and Portugal.

On Thursday, 28 January 2010, the Dow Jones Industrial Average declined 116 points while the S&P 500 and the Nasdaq Composite were down 13 points and 42 points respectively.

In premarket trading, the Dow was trading 18 points lower.

We expect Indian markets to move upwards from here on. We won’t be surprised to see the Sensex  ralling to 16,700 in the coming few days.
 

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