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RBI's 0.25% rate cut: How Urjit Patel's debut policy cheered markets

Domestic equity markets recovered from its day's low in late trades after the Reserve Bank of India (RBI) governor Urjit Patel in his first monetary policy announcement affected a 25 basis point cut in policy rate, which buoyed sentiment for the third straight session.

The RBI's decision certainly enthused market sentiment towards the closing hours, lifting oil & gas, automobile and select banking stocks.



The 30-share BSE S&P Sensex wrapped up the session at 28,334.55, up 91.26 points or 0.3 percent from previous close. A day before, the Sensex had shot up 377 points to end past the psychological 28,000 mark as investors turned optimistic about the rate cut this time, although economists were divided in their opinion.

In all, the Sensex has now surged 500 points in past three sessions, regaining some of its lost ground in recent trades.

Intra-day, the Sensex scaled 162 points to touch a high of 28,404.70, before shedding most of its gains on profit-taking in mid-noon trades. However, positive cues from other Asian indices and the central bank's rate cut decision turned the tide for markets.

"We were expecting a 25 bps cut in repo rate, as the conditions this time were favourable for the RBI to go for a cut. Monsoon in most parts of the country has been satisfactory, and with hopes of inflation moderating further later in the year and foodgrain output likely to be good this year, we are expecting another 25 basis point cut in December monetary policy as well," said G Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory Pvt. Ltd.

In the first policy where the rate decision was taken by the monetary policy committee (MPC), the key lending rate, the repo, was cut by a quarter percentage point or 25 basis points to 6.25 percent. For Urjit Patel too, this is the first policy as RBI governor.

Since January 2015, the RBI has cut the repo rate by a cumulative 150 bps. The RBI has set March 2017 target of 5 percent for inflation.

However, Jay Shankar, Chief India Economist & Director – Religare Capital Markets feels the room for any further rate cut in India seems to have exhausted as of now.

Citing the reasons, Shankar said the RBI expects impact of implementation of the housing allowances portion of the 7th CPC to push up inflation up 100 basis point.

"GST implementation is likely to be inflationary in the first year, although the extent of it will depend on the rates that GST Council decides along with the exemptions. Upside risks to inflation from rising global commodity and oil prices, more so after the OPEC decided to cut output in its meeting earlier this week," said Shankar.

Among the gainers, investors lapped up oil & gas stocks on hopes of improving global crude prices following the recent OPEC decision to cut production to boost prices.

Shares of ONGC scaled a new 1-year high intra-day before ending 5.2 percent at Rs 273.75. Gail also ended 4.5 percent higher at Rs 402.25.

Others such as Tata Steel, Tata Motors, SBI, Bharti Airtel, Adani Ports, Cipla, Infosys and Sun Pharma were up around 1-2 percen each.

“The 25 bps cut by the RBI to boost the liquidity in the system is a welcome move. We expect it will support the economy’s investment demand and uptick in credit environment," said George Alexander Muthoot, Managing Director, Muthoot Finance Ltd.

Updated Date: Oct 04, 2016 16:47 PM

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