Indian bonds and the rupee climbed after the nation’s central bank reduced borrowing costs for the first time since 2009 to revive growth and stocks closed little changed from the day’s high as the authority said there’s not much scope for further cuts.
Benchmark bond yields fell to the lowest level in a month and the rupee rebounded from near a three-month low after the Reserve Bank of India cut the repurchase rate by 0.5 percentage points to 8 percent, as predicted by three of 25 economists in a Bloomberg survey.
The BSE India Sensitive Index (SENSEX), or Sensex, rose 1.2 percent to 17,357.94 at the 3:30 p.m. close, near the intraday high of 17,381.92. India joins nations from Brazil to the Philippines in cutting rates to support demand as political gridlock deters investment and the European crisis dim global prospects. Asia’s third-largest economy grew at the slowest pace in three years in the fourth quarter amid RBI’s record run of rate increases.
“The cut was much larger than anticipated, and if banks decrease rates, it could boost demand,” Vetri Subramaniam, head of equities at Religare Asset Management Co., which has $2 billion in assets, said in an interview today. “Markets will have to balance this positive surprise with the central bank’s commentary that the room for future rate cuts is limited.”
Reserve Bank Governor Duvvuri Subbarao said today consumer price pressures may reduce the scope for further interest-rate cuts. Government data yesterday showed inflation slowed less than estimated in March to 6.89 percent, a pace that is still the fastest among the biggest emerging economies.
The yield on the 8.79 percent bonds due November 2021 fell 12 basis points to 8.34 percent in Mumbai, the lowest since March 14, according to the central bank’s trading system. The rupee climbed 0.4 percent to 51.4850 per dollar in Mumbai. It touched 51.725 yesterday, the weakest level since Jan. 16.
The Sensex has risen 12 percent this year as foreign funds bought a net $8.9 billion of domestic shares, a record for the period, amid optimism the central bank will take steps to ease monetary policy. Gross domestic product may grow 7.3 percent in the year through March 2013, compared with the baseline projection of 7 percent for the previous 12 months, the central bank estimated today.
Subbarao has eased monetary conditions by reducing the amount of deposits lenders must set aside as reserves twice this year to ease cash shortages in the banking system. He left the cash reserve ratio unchanged today.
“By and large, the tone of the policy will continue to remain accommodative for spurring growth,” said Dhawal Dalal, Mumbai-based head of fixed income at DSP Blackrock Investment Managers Pvt. “The RBI may also inject the right amount of liquidity to increase money supply.” The reserve ratio may be cut by a further 100 basis points this fiscal year, he said.
The central bank projected money supply to grow 15 percent in the 12 months through March 2013. The measure, comprising currency in public circulation, bank deposits and money parked in other saving plans, rose 13 percent in the year to March 23, according to central bank data.
Finance Minister Pranab Mukherjee March 16 boosted India’s debt sale plan by 12 percent to a record 5.7 trillion rupees in his budget for the current fiscal year. The borrowing program may keep yields from falling sharply as that may damp appetite for existing notes, DSP’s Dalal said.
One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell eight basis points to 7.86 percent, the lowest level since Jan. 13, data compiled by Bloomberg show.
State Bank of India, the biggest lender, rose 1.7 percent to 2,304.3 rupees. DLF Ltd. (DLFU), the largest developer, climbed 2.9 percent to 205.05 rupees. Larsen & Toubro Ltd. (LT), the largest engineering company, surged 2.4 percent to 1,332.8 rupees.
India VIX, which measures the cost of protection against losses in the S&P CNX Nifty (NIFTY) Index, sank 8.6 percent to 20.31, the most in a month. The Nifty added 1.2 percent to 5,289.70. The BSE 200 Index (BSE200) rose 1.1 percent.
A total 672 million shares changed hands on the BSE and NSE yesterday, 26 percent less than the daily average in the past 12 months, according to data compiled by Bloomberg.
Offshore investors sold a net 5.52 billion rupees ($107 million) of local stocks yesterday, paring their investment in the equities this year to 438.9 billion rupees, according to the nation’s market regulator.