Market Report Sensex at 1-mth High as Weak IIP Number Spurs Rate Cut Hopes

Banks, auto, realty stocks move up on expectation of a fall in financing costs after a likely rate cut

Stock markets closed firm on Tuesday after weak industrial production data for April strengthened hopes of interest rate cuts by the Reserve Bank of India in its meeting on Monday. 
BSE's Sensex gained 194 points, or 1.2%, to 16862.80. Nifty gained 62 points, or 1.2%, to 5115.90 points. 
The subdued industrial production numbers came in the backdrop of a fall in gross domestic product growth for the January-March quarter to 5.3% and a warning of a sovereign debt downgrade by ratings agency Standard & Poor's. 
"After Tuesday's rally, it looks like the market is positioning for a 50-basis points cut in cash reserve ratio (CRR). Somewhere, the market is thinking that irrespective of inflation, there will be rate cuts," said P Phani Sekhar, fund manager – PMS at Angel Broking. 
The central bank had raised interest rates in the past due to steadily rising inflation numbers. Even as wholesale price inflation or WPI numbers for May will be announced on Thursday, analysts are confident that RBI will cut rates. 
"These lacklustre data inevitably increase the RBI's policy 'space' next week to deliver another reduction in the repo rate," said Richard Iley, chief Asia economist at BNP Paribas, in a note to clients. "Re-accelerating inflation, the still extremely fragile rupee and, perhaps most important of all, the continued lack of policy support from New Delhi are important roadblocks to any further easing. Our base expectation is for a reduction in the CRR (perhaps 50 bps)," Iley said, expecting wholesale price inflation to inch up to 7.7%, from 7.2% declared last month. 
Shares of rate-sensitive sectors gained on hopes of the monetary easing, with BSE's realty, bank, capital goods and auto indices gaining 2% to outperform the broader benchmark. 
Godrej Properties surged over 5%, while HDIL, Indiabulls Real Estate and Unitech gained over 3%. Passenger car makers Tata Motors and Maruti Suzuki gained over 3% each. Engineering major Larsen & Toubro and Crompton Greaves gained 2.5%. State-run banks outperformed their privately-run counterparts. CNX PSU Bank index surged 2.43% led by 5% gain in Allahabad Bank, and over 4% gains in Oriental Bank of Commerce and Punjab National Bank. Among private banks, Axis Bank gained 2% while ICICI Bank and HDFC Bank each gained about 1.6%. 
Inflation data on Thursday will be key in adjusting interest rate expectations. A Reuters poll shows the wholesale price index likely accelerated to 7.60% in May from a year ago, the fastest pace this year. Higher WPI could cloud the outcome of the RBI's policy meeting given the central bank has previously expressed concerns about inflationary pressures. 
Nonetheless, stock investors are betting the RBI will have to take further steps to revive growth after last cutting the repo rate by 50 basis points in April and the cash reserve ratio in early March. 
Shares in state-owned power sector lenders rose on hopes that power distribution companies would be allowed to raise electricity tariffs, thereby improving their loan repayment capabilities. 
PFC and REC rose over 2% each.