Indian Stocks, Bonds Rally With Rupee After Unscheduled Rate Cut

Indian stocks jumped the most in eight months and bonds rallied with the rupee after Reserve Bank of India Governor Raghuram Rajan unexpectedly cut interest rates to help revive growth in Asia’s third-largest economy.

The S&P BSE Sensex climbed 2.7 percent to 28,075.55, the biggest gain since May and the best performance in Asia after China. The yield on sovereign bonds due July 2024 slumped eight basis points, or 0.08 percentage point, the most since Dec. 2, to 7.69 percent. The rupee touched 61.4825 per dollar, the strongest level since Nov. 5. The iShares MSCI India ETF rallied 3.6 percent to $31.66 in U.S. trading.

Rajan cut the main repurchase rate to 7.75 percent from 8 percent. The first reduction since May 2013 comes after data this week showed consumer prices held below the RBI’s target for a third month amid a rout in oil prices. Arvind Virmani, a member of the central bank’s monetary policy advisory panel, said Jan. 13 that “it is time to cut rates.”

“The RBI had to take cognizance of falling commodity prices,” Navneet Munot, the chief investment officer at SBI Funds Management Pvt., which oversees $12 billion, said by phone from Mumbai. “The disinflationary forces in the world are getting stronger by the day. We can’t remain insulated.”

Munot said he expects a further 25-basis point cut in the benchmark rate by March.

India, which imports about 80 percent of its oil, has seen its inflation outlook improve amid a 48 percent slump in Brent prices last year. Rajan has focused on curbing inflation since taking office in September 2013, and today’s move signals confidence that the RBI will achieve its target of keeping retail-price gains below 6 percent by January 2016.

‘Battle Won’

“The cut signals that the battle on inflation is broadly won,” said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset Management Co. “Positivity around Indian assets should continue, going forward.”

State Bank of India rose the most since November, sending a gauge of lenders to an all-time high. Mortgage lender Housing Development Finance Corp. surged 7.2 percent to a record. The stock was the best performer on the Sensex.

Housing Development & Infrastructure Ltd., a real-estate developer, surged 18 percent, the most since May. The stock was the top performer on index of realtors, which jumped 8 percent, the most among the 13 sectoral indexes compiled by the BSE Ltd.

Maruti Suzuki India Ltd., the largest carmaker, headed for an all-time high, while Tata Motors Ltd., owner of Jaguar Land Rover, climbed to a six-week high. Tractor maker Mahindra & Mahindra Ltd. rallied to more than a one-month high.

Consumer-price inflation will probably be below the January 2016 target of 6 percent established by the central bank last year, Rajan said. Further easing would depend on data that confirm disinflationary pressures, “high-quality” fiscal consolidation and moves to ease supply of power, land, minerals and infrastructure.

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