The Sensex return in March stands at 10%, which is the best monthly return in the last 4 years. We are up about 13% from the 52-week low in the last 50 days. The Sensex was -4.8% in January and -7.5% in February. The important factors that provided a good start for this performance were a well balanced Budget and an end to the rumors regarding tweaking of long-term capital gain tax in the Budget. The other factors which provided boost to the market were resumption of inflows from foreign institutional investors (FIIs) inflows, the Federal Open Market Committee’s decision to maintain status quo in the US Fed rate last month and increase in expectation regarding the Reserve Bank of India’s key policy rate cut in the upcoming monetary policy review meeting.
FII inflows have turned positive to `228 billion in March compared to `80 billion in February and `115 billion in January. Other than the Budget, the factor which paved the way for FIIs to come back to the Indian market was improvement in the investment outlook for Emerging Markets (EMs) due to change in Fed view regarding US rate hike. In the last FOMC meet on March 16-17, the Fed maintained its status quo on interest rate. FOMC signaled that the future rate hikes will be on the low gear, indicating only two rate hikes in calendar year 2016 due to tepid global growth compared to consensus in December of four rate hikes in 2016. This apart, central banks across the world were increasing their liquidity to support economic and financial activities. The latest data from China were also showing signs of stabilisation, diminishing fears about the extent of the slowdown. This is positive for EMs to attract foreign funds.
During same time, the expectation regarding rate cut in India has increased. Largely, the consensus expects cut in RBI’s repurchase rate by 25 bps from 6.75% to 6.50%. We believe that this 25 bps cut is largely factored in by the market. This is given the sharp pullback and the market is hovering around the important support level. The important question now is whether we will have a surprise cut of more than 25 bps and a positive commentary from the RBI, in which case, the uptrend will continue. The current scenario is positive given the lower inflation that is much below the RBI target of 6% for January 2016 compared to actual 5.18% in February, the sharp cut in small savings rates and recent appreciation in desi currency. RBI’s inflation target stands at 5% for March 2017. The rate decision will be influenced by the increase in oil prices, pay revision implementation and outlook for monsoon. It may be a point of contemplation for the RBI whether to give a shot in the arm to the economy and markets by giving a 50 bps rate cut or spread the benefit of rate cut in accordance with the incoming data. The concern is that the asset quality of banks continues to be under pressure limiting their ability to lower their lending rates in line with RBI’s requirement and expectations. It is important to note that RBI had cut interest rate by in 2015, but this resulted only in an average reduction of up to 75 bps in lending rate by banks.