Interest Rate Unchanged, Markets Erase Gains

After a strong opening, the Indian markets started going lower ahead of the RBI monetary policy review meet. The meet concluded in the RBI leaving the repo rate unchanged at 8% due to concerns over easing leading to a rise in asset prices, particularly that of commodities. Also, with the inflation not having calmed down to a comfortable level, an unchanged rate made more sense to the RBI. The central bank, though, did cut the CRR by 25 basis points from 4.75% to 4.50%.

On the back of this and concerns over China’s growth outlook, the Sensex and Nifty erased the gains seen earlier today. At the moment, the Sensex is trading higher by 28.29 points or 0.15% at 18492.56 and Nifty is trading higher by 8.50 points or 0.14% at 5585.7.

Friday was a cheerful day for the global markets and equities were seen bouncing high due to the announcement of QE3 by the Federal Reserve. This, combined with Europe's announcement of the availability of unlimited funds for buying debt for nations who ask for help, created a merry environment for stocks to trade in.

This situation has now been clouded by data from China, which is raising concerns over the economy’s outlook. Real estate prices have been sky high since 2009, with no signs of cooling down. Furthermore, QE3 has been raising the possibility of asset bubbles, pushing the markets down. While the Japanese markets are closed due to a holiday, Shanghai Composite has been trading lower by 2.11%.

This has also taken a toll on Europe’s opening. The FTSE, DAX and CAC opened lower by 0.40%, 0.30% and 0.60% respectively. European stocks have been weighed down heavily by banks and oil stocks.

On the domestic front, while the overall rally has cooled down, aviation and retail stocks continue to be the top gainers and have appreciated heavily. At the moment, midcaps and smallcaps have larger gains than the Sensex, which indicates an overall lack of strength in the biggies.

Among the sectors, Realty, Capital Goods and Banking continue to top the charts with gains of 4.76%, 2.63% and 2.36% respectively. Interest rate-sensitive stocks are trading higher, with considerable gains seen in the Auto, Realty and Banking stocks. At the same time, FMCG is trading lower by 2.89%. The index is weighed down heavily by ITC, which is down 4.31% today.

We believe that the markets will continue trading higher throughout today’s trading session on the back of fiscal reforms. Action on this front has already resulted in a strengthened rupee, which has broken the barrier of 54 to the dollar and would continue to support the markets' positive move.