For a change, Dr. D. Subbarao decided to spring a positive surprise on the markets by cutting the RBI’s key policy rate more than expected. Though he also hinted at a long pause before another repo rate cut, the markets chose to overlook that bit of caution. They decided to celebrate the start of monetary easing, which has come after a gap of three years. Whether the RBI has judged the rate call to perfection or taken a big gamble only time will tell. For now, there is a feeling of relief across the board – be it markets, consumers, companies or the Government.
 
Coming to today’s session, the key indices started flat and remained absolutely lackluster prior to the announcement of the RBI policy at 11:00 am. There was a big spike immediately after the RBI declared the 50 bps cut in the repo rate. However, the euphoria fizzled out and the indices turned flat again before rebounding after the European markets picked up pace. US stock futures were also pointing to a higher opening while most Asian markets closed in the red amid worries about slowdown in China and Spain’s fiscal mess.
 
In the end, the NSE Nifty closed near 5,300, rising by more than 1%. The BSE Sensex too advanced by over 1%. It was a game of Large-Cap stocks today. So, the broader indices naturally under-performed the frontline peers. The market breadth was positive and all the sectoral indices ended with gains. In another positive, the INDIA VIX slumped by 8.6%.
 
The BSE Sensex ended at 17,357, up 206 points over the previous close. It had earlier touched a day’s high of 17,381 and a day’s low of 17,103. It opened at 17,200. The NSE Nifty was quoting at 5,289, up 63 points over the previous close. It earlier touched a day’s high of 5,298 and a day’s low of 5,208. It opened at 5,266.
 
The BSE Small-Cap index and the BSE Mid-Cap index rose 0.6% and 0.7%, respectively.
 
The BSE 100, BSE 200 and BSE 500 indices all gained ~1% apiece.
 
Banking shares rose post the surprisingly higher rate cut announced by the apex bank.
 
The BSE Bankex gained 0.8%. All the sectoral indices of the BSE ended in the green.
 
Rate sensitive sectors such as Realty and Auto clocked gains of 2.4% and 0.8% respectively. The half a percentage point cut in key interest rates would translate to cheaper home, car and personal loans.
 
Metals, PSU, Capital Goods and Power were the other notable gainers.
 
Top gaining stocks on the Sensex and the Nifty were ONGC, Coal India, Hindalco Inds, DLF, Hero MotoCorp, GAIL, L&T, RInfra, RCom, RPower and JP Associates.
 
Notable losing stocks on both the indexes were few. They were Cairn India, HCL Tech, Dr. Reddy’s, Kotak Mahindra Bank and M&M.
 
The RBI slashed the repo rate by a more-than-expected 50 basis points to revive economic growth. The Indian markets had priced in a repo rate cut of 25 bps.
 
The CRR and all other policy rates have been left unchanged.
 
At the same time, the RBI has hinted that it has very limited space to cut the repo rate further as the deviation of GDP growth from its trend is modest and upside risks to inflation persist.
 
"The central bank will actively consider a further rate cut only at its July 31st monetary policy meeting, making the mid-quarter review in June largely a non-event," said India Infoline in a research note. The domestic brokerage expects 100-125bps repo rate cut in FY13.
 
"Immediate monetary transmission of the 50bps repo rate cut would require a benign liquidity environment. In the face of large government market borrowing program, RBI would have to infuse liquidity through CRR cuts and OMOs," India Infoline said in its note. India Infoline estimates 2-3 months' lag in actual reduction in lending rates by banks.
 
The RBI expects today's policy actions to stabilise growth around its current post-crisis trend while also containing risks of inflation and inflation expectations re-surging.
 
The RBI also expects its action today to enhance the liquidity cushion available to the system.
 
The stance of monetary policy is intended to:
 
1. Adjust policy rates to levels consistent with the current growth moderation.
2. Guard against risks of demand-led inflationary pressures re-emerging.
3. Provide a greater liquidity cushion to the financial system.
 
The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation, the RBI said in a statement.
 
However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates, it added.
 
"Overall, the rate cutting cycle is likely to be more calibrated in FY13 rather than aggressive, as the recovery in economic growth will at best be modest. At the same time, a number of pressure points continue to lurk in the background. Sticky inflation, weak BoP, high fiscal deficit, fragile currency, unpredictable money flows, policy inaction and global uncertainties are the main risks.
 
With the 50 bps repo rate cut, the RBI has effectively sent a signal to the Government that the further push to the economy should come from the fiscal side. Therefore, the ball is now in the Government's court to try and complement the central bank's action in reviving investor confidence," says Amar Ambani, Head of Research, IIFL.
 
Asian stocks finished lower amid lingering worries about Spain’s debt problems. Mainland Chinese and Hong Kong stocks fell sharply after data showed that FDI into China fell 6.1% in March from the year-earlier period to US$11.76 billion. Banks and airlines were the top losers in China while miners lost ground in Australia.
 
European stocks extended gains after the ZEW index of German investor sentiment showed an unexpected rise in April for a fifth straight monthly gain. The indicator rose to 23.4 from 22.3 in March, against expectations for a decline to 20.0. Separate data showed uptick in inflation in the eurozone as well as in the UK. Borrowing costs increased for Spain at a bill auction.
 
China’s yuan, Taiwan’s dollar and the Philippine peso led gains among Asian currencies. But, the Australian and New Zealand dollars fell for a third day amid ongoing risk aversion.
 
The euro gained against the yen and dollar after Spain managed to raise more money at a bills auction.