The Sensex closed 729 points higher at 28,075.55, notching up its best single-day point gain since May 4, 2009. The trigger was a surprise rate cut by Reserve Bank Governor Raghuram Rajan, who lived up to his credo of "never say never" by announcing a 25 basis point cut in benchmark repo rate.
Anand Mahindra, chairman of India's biggest utility vehicle maker M&M, tweeted, "Three cheers! The RBI Governor has moved from being 'Reluctant Raghu' to 'Rate-cut Raghu!'".
Three cheers! The RBI Governor has moved from being 'Reluctant Raghu' to 'Rate-cut Raghu!'anand mahindra (@anandmahindra) January 15, 2015
Here are the reasons for the sharp gains in stock markets:
1) Softer interest rate regime likely: Morgan Stanley economists expect a further 125 basis point rate cut over the next 12 months. "CPI inflation will stay at closer to 5 per cent in 2015, as the reduction in fiscal deficit, sustained deceleration in rural wages and lower global commodity prices will mean that inflationary pressures in the economy will be contained," said Chetan Ahya of Morgan Stanley.
Motilal Oswal, chairman of the eponymous financial services firm, tweeted, "This rate cut is a beginning of a series of rate cuts by RBI given Rajan's commitment to NOT FLIP FLOP once he begins the process."
This rate cut is a beginning of a series of rate cuts by RBI given Rajan's commitment to NOT FLIP FLOP once he begins the process.Motilal Oswal (@MrMotilalOswal) January 15, 2015
2) Boost to domestic growth: Thursday's rate cut, the first since May 2013, will help kick-start the investment cycle, a precursor to higher GDP growth, which has stayed below 5 per cent over the previous two years. Sonal Varma of Nomura said, "The shift in RBI monetary policy stance towards easing should lead the market to price in further rate cuts. This would support a pickup in local growth momentum and further raise the prospects for foreign portfolio inflows."
3) Government, RBI on same page:According to Reuters, Thursday's rate cut could ease the relationship between Finance Minister Arun Jaitley and Dr Rajan. "If there is a deal between Rajan and Jaitley, that's very very positive," said Surjit Bhalla, chairman of Oxus Investments. "Monetary and fiscal policy should be coordinated," he added. Notably, Mr Jaitley has been asking for a rate cut citing the sharp ease in retail inflation.
4) Rupee could benefit:The performance of Indian stock markets is closely linked to the fortunes of the rupee, which jumped 1 per cent to a two-month high of 61.49 against the dollar in intraday trade. "Since October 2002, the INR has rallied in 7 of the 10 rate cut announcements, with an average gain of 0.3 per cent against USD over the subsequent two sessions. The Nifty rose in 8 out of the 10 occasions, with an average 1.9 per cent gain," said Nomura.
Analysts expect markets to post new highs soon, given the continued pressure on crude oil prices and hopes of further reforms in the upcoming Budget.