Short-covering, global cues trigger recovery

The much-awaited cut in benchmark interest rates by the Reserve Bank of India (RBI), after trading hours on Wednesday, may spark a rally in Indian equities on Thursday. But fund managers are sceptical of a sustained uptrend, as concerns about the global economy and the financial system will resurface once euphoria about the rate cuts wanes. “The RBI move is expected to boost sentiment in the short-term, but this is certainly not the critical trend reversal trigger for the medium-term,” said SBI Mutual Fund fund manager-equity Jayesh Shroff. The central bank reduced repo and reverse repo rates by 50 basis points each, in line with street expectations. Repo is the rate at which the centralbank lends to banks, while reverse repo is the rate at which it borrows from them. However, the timing of the rate cuts have surprised some market participants. “The way in which the rupee has been falling and is expected to fall further, the rate cuts at this juncture have come as a bit of surprise,” said Birla Sun Life Mutual Fund CIO A Balasubramanian. “There could be a pullback rally in equities, led by banks,” he added. Though equity benchmarks rebounded on Wednesday, after closing at a three-year low on Tuesday, much of the rise was led by short-covering in the later part of the session. BSE’s 30-share Sensex closed at 8,446.49 points, up 19.2 pts, or 0.2%. NSE’s 50-share Nifty ended at 2,645.20 pts, up 22.6 ps, or 0.87%. Bears retained their grip in the broader market, with losers outpacing gainers 1440:993. Stock gains on Wednesday were in line with trend globally after China, the world’s third-largest economy, hinted at unveiling another fiscal stimulus package on Thursday to revive the economy’s fast growth rate. The news sparked a rally in the global commodity prices, too. Back home, shares of metal producers led gainers on Wednesday on expectations that a boost to the Chinese economy could spur demand for metals. Banking shares were the biggest losers, with traders continuing to add their short positions in these stocks. Traders expect a lot of these short positions to be covered on Thursday on account of the interest rate cuts.