Why Sensex is up 1,000 points despite the RBI raising interest rates today

  • Oct. 1, 2022, 12:44 p.m.

Indian stock markets made a sharp recovery after the Reserve Bank of India announced its monetary policy decision, with the Sensex ending up over 1,000 points at 57,426. Analysts said that the market is drawing comfort from expectations that the RBI may be nearing the end of the rate hike cycle in India. The RBI raised its benchmark repo rate by 50 basis points today, the fourth straight increase, as policymakers battled stubbornly high inflation, and analysts predicted further tightening.The RBI has now raised rates by a total of 190 basis points since its first unscheduled mid-meeting hike in May.

"The Indian equity market witnessed a sharp bounceback after a seven-day fall. The decline in the dollar index, combined with the lack of a negative surprise from the RBI, resulted in a strong short-covering in the market.Technically, the Nifty was sitting near the 16800-16635 demand zone and the derivative data was extremely oversold as FIIs started the October series with 87% of short positions in the index future. Therefore, we saw a powerful short-covering rally, "said Santosh Meena, Head of Research, Swastika Investmart.

European markets were also higher today as the dollar index cooled to one-week lows. " The Nifty witnessed a bullish engulfing candlestick pattern on the daily chart from the support of the 100-DMA, which is a very encouraging sign for the bulls. On the upside, 17190 is an immediate hurdle, and 17325-17425 is the next critical supply zone.

"Bank Nifty also witnessed a sharp bounce back from the psychological support level of 37500. Above this level, we can expect a move towards the 39700 level which may coincide with the 20-DMA. Anecdotally, the first day's low or high of the new series acts as strong support and resistance throughout the series. Therefore, today's low of 17647 has become a sacrosanct reference point for the bulls. In terms of the sector, "the leader of the current bull run, banking and financials, outperformed," he added.

Banking stocks have taken the lead in today's advance, with the Bank Nifty index up 2.6%.

"RBI hiked the policy rate by 50 bps along expected lines and also maintained its stance as "withdrawal of accommodation", citing that the real policy rate (adjusted for inflation) is still trailing pre-pandemic levels. While inflation forecasts have broadly been maintained, GDP growth estimates for FY23 have been revised down marginally from 7.2% to 7%. This indicates that the central bank is somewhat comfortable with the macro-economic situation in India relative to other peer emerging economies, "said Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance.

Therefore, we feel that the RBI may be nearing the end of the rate hike cycle in India and future rate hikes will have more to do with supporting the Indian currency and also, to some extent, the inflation trajectory. Both equity and bond markets have taken this in a positive stride and have rallied post the policy announcement. "

The RBI commentary has been a finely balanced one—while global risks are discussed extensively, the RBI appears confident in the growth momentum in the Indian economy in the coming months. The modest downward revision in the FY23 GDP growth target to 7%, from 7.2% earlier, and leaving the inflation forecasts largely unchanged are on expected lines. "While today's RBI communication suggests that future policy will be data dependent and that another round of rate hikes cannot be ruled out," said Siddhartha Sanyal, Chief Economist and Head of Research at Bandhan Bank, "the MPC refrained from springing any major surprises, leading to a broadly positive reaction from most segments of the financial markets."

Religare Broking in a note said that the RBI's confidence in the Indian economy is the highlight of today's monetary policy.

"The RBI's decision to raise the repo rate by 50 basis points was very much in line with market expectations, but the RBI's confidence in the economy has been the highlight of monetary policy."The Governor's confidence that the GDP growth rate for FY23 will remain at 7% comes from his statement, "the late recovery in kharif sowing, the comfortable reservoir levels, improvement in capacity utilization, buoyant bank credit expansion, and the government’s continued thrust on capital expenditure."

Lastly, Deputy Governor Mr. Michael Patra’s response to a question in the press conference where he stated, "Soft-landing is for the developed economies; for India, it’s a take-off" sums everything up. We believe RBI and the government are handling the economy far better than their major global counterparts, "said Siddarth Bhamre, Head of Research, Religare Broking Ltd.

Author : Rajdhani Delhi Representative

Rajdhani delhi representative

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