Mumbai, Sept. 5: The markets came roaring back on Thursday in a rah-rah response to Raghuram Rajan’s wave of reforms announced yesterday in his “short-term timetable”.
The Sensex surged 412 points as investors scooped up banking stocks on the expectation that the new RBI governor would be able to push big changes in the financial sector.
The Bankex recorded its biggest gain in four years, with the index propped up by the 8.1 per cent rise in the HDFC Bank stock to Rs 609.50 and 9.3 per cent leap in ICICI Bank to Rs 893.70. Axis Bank and Yes Bank were the big gainers recording double-digit percentage growth in their share prices.
The rupee also appreciated against the dollar as it added 106 paise to close at 66.01 on the expectations that some of the measures announced by the new RBI governor would lead to higher inflows.
It is estimated that dollar inflows from non-resident Indians (NRIs) could swell by $8-10 billion, which would help fund the nation’s current account deficit (CAD).
Soon after taking over as the governor of the RBI, Rajan gave domestic banks the freedom to open branches anywhere in the country. He also indicated that more measures would be announced during his three-year tenure. The announcements were made after market hours and the bourses reacted to them today.
Market analysts said that at a time the government was being slammed for its policy inaction, the measures announced by Rajan came as a blast of fresh air.
Rajan has already indicated that the central bank may over a period of time bring down their statutory liquidity ratio, which is the ratio of bank deposits that must be invested in government securities.
Amid optimism over these announcements and hope that more measures would be unveiled soon, investors were seen making heavy purchases in banking stocks.
Banks had to bear the brunt of the recent collapse in the market because of the impact of liquidity tightening measures that the RBI has taken since mid-July. The extent of investor interest in bank stocks could be seen from the fact that the BSE Bankex was the largest sectoral gainer in percentage terms, rising over 9 per cent. Earlier, beaten down stocks such as Yes Bank rose 22 per cent to Rs 287.35, and Axis Bank by nearly 16 per cent to Rs 927.45.
Other interest rate sensitive sectors such as real estate also rose in tandem with banking, amid fresh hope that there could even be a relief on the interest rate front from Rajan in the coming days.
The euphoria was also evident in the forex markets. The rupee opened strong at 66 to the dollar from the previous close of 67.07 and moved in a range of 65.54 to 66.52 before ending at 66.01, a rise of 106 paise, or 1.58 per cent.
The RBI governor had announced several steps designed to boost dollar inflows that included a special concessional window to swap foreign currency non-resident (FCNR) deposits and allowed domestic banks to borrow more from overseas markets.
“We think these deposits, along with the benefits of some of the other announcements, could total $10 billion over the next three months,” Barclays said in a note.
Experts, however, caution that the rupee is unlikely to stage a major rally against the US dollar because of overseas factors. “Over the near-term fears of the Fed tapering and tensions in West Asia would keep the currency ranged against the dollar, between 65 and 67.5 on spot,” said Anindya Banerjee of Kotak Securities.
But not everyone was rejoicing over Rajan’s announcements. Brokerage Emkay Global said many of his announcements were a “carryforward from the previous governor’s actions like the primary objective of ensuring price stability”.
Morgan Stanley slashed its Sensex target for the next 12 months to 18200, citing weakening macro fundamentals of the Indian economy.
“We cut our Sensex earnings growth estimates from 10.5 per cent to 4.1 per cent for this fiscal and from 19 per cent to 12.7 per cent for the next. The new 12-month forward target is 18200. Given the tail risks, we underscore our bear case — a 14 per cent fall in the Sensex with a 35 per cent probability,” Morgan Stanley India head Ridham Desai said.