Markets Bet On Monetary Easing

The Indian markets saw some massive upward movement that led to the benchmark indices surging 2.5% to a 28-month high. The Sensex rose by 490.67 points to end the day at 20212.96 and the Nifty ended the day higher by 151.35 points at 6146.75. This marks the highest one-day gains in 18 months.

Clearly the reason behind this was the decline in WPI numbers on Tuesday that led to Reserve Bank of India Governor D Subbarao saying he had taken note of the decline in inflation. This reinforced hopes in the market of a probable interest rate cut in the monetary policy review meet scheduled to be held in June 2013.

This led to gains in the rate-sensitive sectors of automobiles, banking and real estate. The BSE Auto, Bankex and Realty indices saw appreciation to the extent of 2.29%, 3.95% and 4.04% respectively. Will gains extend to today?

The macroeconomic outlook looks favourable with inflation coming lower. The positive sentiment evolved due to hopes of a rate cut is expected to stay in the markets. The market rally was driven by underperforming sectors thus indicating expectations of recovery. Although there has been concern over the current account deficit front after Monday’s data, the decline seen in inflation numbers provides the market with substantial relief. Moreover, the inflows from FIIs look strong; hence suggesting the sustainability of this rally. Also, global macroeconomic trends underline this movement and add to sentiment.

In the US, The Empire State manufacturing survey turned negative in May, missing street expectations. A negative reading is indicative of more survey participants expecting conditions to worsen. However, wholesale prices dropped in April by 0.7% marking the biggest decline in three years. This led to the markets hoping for quantitative easing to continue without having to bother about a spike in inflation.

Similarly in the UK, the Bank of England’s inflation report had Governor Mervyn King say that there is welcoming change in the economic outlook and that growth is likely to reach 0.5% in the second quarter. This had equities in the US and Europe gain between 0.27% and 0.52%.

Overall, on account of positive sentiment in domestic markets and in global markets, today looks like a positive day for the Indian markets.