For the first time, India stocks climbed past the 30,000 mark on March 4 and then plunged as investors claimed the recent climb was excessive.
India’s Sensex Plunges alongside Weak Rupee as RBI Cuts Interest Rates
The S&P BSE Sensex fell by 0.7% down to 29,380.73 at the end of the market. Following a cut in interest rates by the Reserve Bank of India (RBI), the S&P rallied 1.5%, a record high. This is the second time this year that the bank has cut interest rates.
Meanwhile, the Sensex increased 7.6% on March 3 following the budget that saw Prime Minister Narendra Modi increase spending on infrastructure. The rally caused the Sensex index to gain to 69, which some investors interpret as an indication to sell.
Alex Mathews, research head Geojit BNP Paribas Financial Services said, ‘In the short run, the markets were overbought. Due to the interest rate cut, the markets opened with a gap and this forced some investors to close their open positions a little bit later.”
The CNX Nifty Index flanked down to 8,922.65, a 0.8% fall from a record high. Interest for Nifty futures fell by 3% from an all-time high point of 1.2 million contracts at the end of the intraday trading session.
Governor Raghuram Rajan cut down interest rates from 7.75% to 7.5%, citing that India’s economy, the third largest in Asia is weak.
Economists were surprised by the cut, as they were not expecting a reduction of interest rates prior to the next policy review that is scheduled for April 7.
Weakening of the Rupee
For a month now, the rupee has continued to weaken at a rate of 0.6% to close at to 62.2625 to the dollar, moving away from the intraday day 0.4% gains.
Ashtosh Raina, the head of foreign-exchange trading at HDFC Bank in Mumbai said, ‘The currency should have rallied following the interest rate cuts and amidst improving economic fundamentals but instead the rupee kept up with the drop in the stock market.”
The yields on bonds that are due July 2024 plunged by 0.07% down to 7.69, which has been the lowest witnessed since February 2. At the same time, interest rate swaps for one year fell by 17 basis points down to 7.60%, the largest decline in two years.
The declining interest rate swaps are an indication that investors are wagering that interest rates will go down again by an additional 50 basis points by the close of 2015. This would be the most dramatic decline for an emerging market, with Turkey leading the pack.
Arun Jaitely, India’s Finance Minister said that infrastructure spending would increase by 25% and will be primarily funded by market loans and state funds.
This year alone, the Sensex has shown a gain of 6.8% and is trading at 16.5 times higher than the anticipated yearly earning. On March 3, foreign investors bought a total of $121.8 million worth of domestic shares, bringing the total inflow to $4.6 billion, the largest among the top eight markets in Asia.
The Reserve Bank of India reduced the repo rates to 7.5%, a reduction of 25 basis points. The RBI cited a need to compensate the fiscal consolidation delay and to comply with the budget announcement. This is indeed a surprising move given that high budget deficits typically trigger faster, not delayed, fiscal consolidation.
The decision to lower repo rates may help the USD/INR currency combination to strengthen at Fibonacci 61.8% retracement amidst anticipation for further rate cuts.
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