Banks, rate-sensitives drive markets ahead of RBI policy

Markets recorded a stellar start to the new financial year, rising about 1% on Wednesday, its biggest gain in four weeks. Stocks in banking and other interest rate-related sectors rallied, anticipating another rate cut by the Reserve Bank of India (RBI) in its bi-monthly policy review, scheduled for Tuesday (April 7).

The BSE Sensex rose 302 points, or 1.05%, to close at 28.260, while the National Stock Exchange Nifty rose 95 points, or 1.12%, to end at 8,586.

Analysts said markets were hopeful RBI would announce a cut in interest rates, after the past two off-policy rate-cut announcements slashed rates by a combined 50 basis points. “Now, it looks like the US Federal Reserve might not look at steep immediate rate rises. Markets are hoping RBI would go for more aggressive rate cuts. This would help bring down the differential between Indian and US interest rates,” said Pankaj Pandey, head of research, ICICI Direct.

On the BSE, banks were among the major contributors. State Bank of India, ICICI Bank, HDFC and Axis Bank were the highest gainers, rising 1.6-2.4% each. Other gainers included Sun Pharma, which rose 5.5% ahead of its merger with Ranbaxy. Automobile sector stocks also gained, rising about one%. Tata Motors and Mahindra& Mahindra rose 2.6 and 1.2%, respectively.

On Wednesday, one in four shares saw a decline on the BSE.

The banking, healthcare, fast-moving consumer goods and realty sectors were the top performers, gaining one-two% each.

In 2014-15, the Indian market has been amongst the best performers, returning as much as 30% on hopes of renewed economic activity spurring growth in the economy. Much of the optimism came after the National Democratic Alliance government came to power at the Centre, following general elections in April 2014.

Analysts said the mood in the market would be cautious but optimistic, as investors expected equities to see average returns of about 20% in the year ahead. “We expect returns of 18-20% next year. Markets will do well, especially in the second half because of a pick-up in earnings,” said Vikas Khemani, head of institutional equities, Edelweiss Securities.

While the economic recovery in 2014-15 fell short of expectations, markets have rallied, already pricing in an earnings turnaround. Experts said this could pose a risk to the market, as the difference between expectations and actual earnings growth might be wide. “Markets are running on forward earnings expectation. If the earnings do not match markets expectations, we could see some pressure on the market. This is a risk that could play out in the second half of the year,” said Pandey.

The year ahead could see the Nifty inching closer to five-digit levels. Experts say it could touch 9,500-9,750 by the end of 2015-16. Both domestic and foreign brokerage houses expect the Sensex to cross the 33,000 mark.

For 2014-15, foreign investors were net buyers of Indian equities by Rs 1.1 lakh crore. On Wednesday, they net-bought equities worth Rs 209 crore. Domestic institutions, net-buyers of equities by Rs 72,710 crore in FY15, net-bought equities worth Rs 197 crore on Wednesday.