India's Sensex Rallies the Most in Two Weeks on Rate Cut Bets

  • Govt. cuts small savings rate, stoking rate-cut speculation
  • Global funds have bought shares worth $1.9 billion this month

Indian stocks rallied to a ten-week high as lenders and property developers rallied amid speculation the central bank will lower borrowing costs after the government cut interest rates on small savings plans.

State Bank of India rose to a two-month high. IDBI Bank Ltd. gained for a fifth day amid report that the government is keen to bring large investors on board. ITC Ltd. rallied to a three-month high, while Hindustan Unilever Ltd. was the best performer on the S&P BSE Sensex. Prestige Estates Projects Ltd. was the biggest gainer on an index of property companies. State-owned Dredging Corp of India Ltd. soared the most since May 2014.

The Sensex jumped 1.3 percent at the close Mumbai, climbing above its 100-day average for the first time since October. The government on Friday pared interest rates on public provident fund and senior citizen deposits, stoking speculation of a interest-rate cut by the Reserve Bank of India in its April 5 policy review. The Sensex has risen 9.1 percent this month after Finance Minister Arun Jaitley in his Feb. 29 budget pledged to further cut the fiscal deficit and announced a slew of measures to boost rural demand.

“It’s almost a consensus now that a rate cut will be happen, especially after the small savings rate has been cut," Sadanand Shetty, a senior fund manager with Taurus Asset Management Co., which has $520 million in assets, said by phone from Mumbai. “The RBI and the government are on the same page. People are assessing if we’ll get a 50-basis point cut.” He’s bullish on companies tied to the economy, including lenders, cement makers and fuel retailers.

Rate Transmission

The reduction in small savings rate addresses concern that the plans were cannibalizing deposits in the banking system and preventing lenders from passing on last year’s 125-basis point cut in the RBI’s main rate. Governor Raghuram Rajan has been urging banks to speed up transmission, while keeping the repurchase rate at 6.75 percent since September. Data last week that showed consumer inflation slowed to a four-month low in February has added to expectations of policy easing.

State Bank of India climbed 2.9 percent to its highest level since Jan. 13. HDFC Bank Ltd., the biggest lender by market value, gained 1.7 percent. IDBI Bank surged 4.6 percent to its highest since Jan. 13. CDC Group is in talks to buy a stake in the lender, the Mint newspaper reported, citing unidentified person with direct knowledge.

Cigarette Prices

ITC increased 2.1 percent, taking this month’s advance to 12 percent. The prices of the company’s Classic and Gold Flake brand cigarettes will rise 13 percent, ET Now TV channel reported in Twitter posts, citing unidentified people familiar with the matter. Hindustan Unilever jumped 3.7 percent to its highest level since Aug. 11.

Prestige Estates rallied 10 percent, extending Friday’s 6.6 percent climb. Dredging Corp soared 15.5 percent, the most since May 2014. The government will focus on cutting logistics costs from 18 percent to 12 percent by developing coastal shipping, inland waterways, Transport Minister Nitin Gadkari said in Press Information Bureau statement after market hours on Friday.

The Sensex has surged 9.9 percent in March, set for its best month since January 2012, trades at 15.5 times 12-month projected earnings. The MSCI Emerging Markets Index trades at a multiple of 11.6.

Foreigners bought $140 million of local shares on March 17, reducing this year’s outflows to $964 million. They’ve invested a net $1.9 billion in March, set for the biggest monthly purchase since January 2015.

“Foreign investors generally like countries that manage their balance sheet well," Shetty said. “India is consolidating its fiscal deficit, while countries are expanding their balance sheets through fiscal stimulus.”

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