MUMBAI: Interest sensitive stocks surged on Thursday, on expectation of a cut in interest rates
. The buzz in the market is that the Reserve Bank of India will announce a 50 basis points cut in lending rates towards the end of the week.

At 10:46 am, key interest sensitive sectors – auto, banks and realty – were trading
in the higher zone. Auto majors Mahindra & Mahindra (up 3.3% at Rs 294), Tata Motors (up 0.9% at Rs 134.50) and Maruti Suzuki (up 1.7% at Rs 628) witnessed good buying from institutional investors.

Banking sector major HDFC (up 1.9% at Rs 1391) and SBI (up 1.3% at Rs 1084.75) also witnessed good trading interest from investors. Among midcaps, Federal Bank (at Rs 136.65), Bank of India (at Rs 224.60), Oriental Bank (at Rs 114), PNB (at Rs 371.5) and Union Bank (at Rs 129.40) were trading higher in the range of 1 and 2.2%.

According to analysts at Enam Securities, the RBI is expected to cut interest rate by 50-100 bps in the wake of IIP numbers touching a 15-year low. “There could be a unsustainable bounceback in interest-rate sensitive sectors in the short-term. The medium-term outlook remains very uncertain,” an Enam report said.

The unchanged planned expenditure in the interim budget means that the outgoing government has left it to the next government to announce any new fiscal stimulus measures after the elections, adding to the lags in implementation. And the new government is at least four months away.

Such a situation puts RBI in the driving seat–to drive growth squarely on monetary policy. “The ineffectiveness of the monetary policy transmission also argues in favour of cutting rates aggressively to ensure a greater pass-through to lending rates. Therefore, we continue to expect the RBI to cut both the repo and reverse repo rates by 50bp each in March and by a further 100bp by mid-2009. We also expect the cash reserve ratio to be lowered by 200bp to 3.0% by end-2009,” said Sonal Varma of Nomura Holding in a note to its clients

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