Investors hope for rate cut, eye monetary easing in Euro zone

India’s key stock market indices gained the most in Asia on Monday, amid expectations that the Reserve Bank of India (RBI) could surprise markets with an interest rate cut, and hopes for monetary stimulus in the Euro zone and America.

The Bombay Stock Exchange benchmark, the Sensex, jumped 1.8 per cent or 304.49 points, to close at 17,143.68. This was the biggest daily percentage gain for the 30-stock index since June 29, after it added 1.2 per cent on Friday. At the National Stock Exchange, the 50-stock Nifty index leapt 1.96 per cent, or nearly 100 points, to 5,199.80.

The prospect for global easing measures are raising hopes that the RBI could announce an interest rate cut in its monetary policy review tomorrow, despite an overwhelming number of analysts who expect the repo rate to remain unchanged. A rate cut would also fly in the face of hawkish warnings from RBI Governor D Subbarao, who has warned about inflationary pressures, while prodding the government to pass policy and fiscal reforms.

Still, those who expect rate cuts also argue RBI might not be able to ignore the economic slowdown, while noting core inflation remains below five per cent, offsetting the potential impact on food prices from weaker-than-expected monsoon rains. “There is a great chance that RBI will chip in with a surprise 25 basis points cut on the repo rate,” said Vaibhav Sanghavi, director at Ambit Capital. “The more important thing to look forward to is any movement on the reform process. Along with stability in Europe, it will aid the market on the positive side,” he added.

Banking stocks rallied on the back of betting on a surprise move from RBI tomorrow and hopes that the sector was reducing its non-performing assets. ICICI Bank added 3.9 per cent to Rs 964.30, rising for a consecutive session after its better-than-expected April-June results on Friday.

Global stocks rose to their highest in more than three weeks on Monday, underpinned by expectations the US Federal Reserve and the European Central Bank would provide stimulus to support their struggling economies. Inflows into safe-haven German government bonds waned, keeping prices close to three-week lows after ECB President Mario Draghi said the central bank would do whatever it took to preserve the euro, a message echoed by German Chancellor Angela Merkel and French President Francois Hollande.

This raised expectations that the ECB could take bold measures to lower soaring Italian and Spanish borrowing costs and support riskier assets. However, some investors doubted that ECB policymakers would deliver in line with market expectations when they meet on Thursday, and this kept the euro lower. Germany’s Bundesbank is opposing a resumption of the ECB’s bond-buying programme.

Source: Business Standard

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