The market closed for the week, truncated by two holidays, on a buoyant note. Sensex closed at 25,337.56 with four successive gains and Nifty closed at 7,716.50, clocking gains for the sixth day in a row. Sustained FII buying and hopes of a rate cut from the Reserve Bank were the main factors behind the rally. Sustained selling by domestic institutional investors did not dampen the sentiments.
Presently, there is a consensus in market circles that a rate cut by RBI is imminent. The question is not whether RBI will cut or not, but by how much? A 25 bps cut has already been factored-in by the market. A 50 bps cut will be a pleasant surprise that can lift the markets higher.
The fact is that the macro environment is favourable for a rate cut. CPI inflation for February came in at 5.18% against 5.69% in January. This is much lower than the RBI’s target of 6% for end-Jan 2016. Food inflation is down to 5.3% in February. Meanwhile, IIP had contracted by 1.5% in January. The government has prepared the ground for rate cut by targeting 3.5% fiscal deficit for 2016-17. More importantly, it had mustered the courage to cut the interest rates on small savings. It is time for RBI to provide the monetary stimulus.
Recovery in crude and metal prices paved the way for a quick bounce in the relevant stocks. The realisation that the worst is over for commodities has brought about a marked change in market sentiments. Sovereign Wealth Funds from commodity exporting countries have stopped selling and this has emboldened other FIIs to increase their buying. The Fed chief’s statement that the rate hikes in 2016 is likely to be two and not four as indicated last December also paved the way for additional FII inflows.
On Wednesday, the last day of the trading week, PSU banks were under pressure following indications from Standard & Poor’s that the credit profiles and ratings of some PSU banks may be lowered. Metals, telecom and aviation stocks gained in trade.
In April, the market will start responding to the Q4 results. Private sector banks are likely to post good results as indicated by advance tax figures. IT also is likely to do well. Pharma results are likely to be a mixed bag. Some mid and small caps are likely to show stellar performance leading to substantial rise in their stock prices.
It might appear to some investors that at the present level of valuations, there are no fundamentals to justify a further rally in stock prices. This is an error of perception. Stock market history indicates that most rallies happen when least expected and the justification for the rally happens later. Markets will be always ahead of the fundamentals.