Sensex Soars 434 pts on Rate Cut Hopes

Market Report Benchmark logs year's biggest daily percentage gain of 2.7%; ECB stimulus hopes perk up sentiment India's benchmark indices rose 2.7% on Wednesday, posting their biggest daily percentage gain since early January, boosted by hopes of a policy rate cut by the Reserve Bank of India in its upcoming meeting. Expectations that the European Central Bank (ECB) will announce more stimulus measures on Wednesday to resolve eurozone's financial problems also contributed to the gains in global markets.  While the ECB resisted from cutting policy rates on Wednesday, investors are hoping that the region's central bank will extend its refinancing programme to banks. Euro Stoxx 50 was up 1.3% at the time of going to print. The Sensex jumped 433.66 points to end at 16,454.30. The Nifty gained 133.80 points to close at 4,997.  "There are three main catalysts for India: policy action, FII flows and a rate cut. The first two are hard to influence. Rate cuts are now being priced in which is driving the Indian indices higher," said Tarun Kataria, chief executive officer – India, Religare Capital Markets.  Hope of the Indian central bank easing monetary policy further has lifted Indian stocks in the past three days.  The RBI, which will meet on June 18, is expected to trim the repo rate but may not cut the cash reserve ratio (CRR) for banks.  Broker Nomura expects the central bank to cut the repo rate by 25 basis points due to continued weakness in domestic demand and moderate core inflation. But, interest rate cuts are only a quick fix to growth, it said.  "Without concomitant fiscal tightening, a loose monetary policy will likely fan inflation and lead to greater macro-economic instability down the road," said Nomura's economists Sonal Varma and Aman Mohunta in a note to clients.  Foreign and domestic institutions net bought shares worth . 270 crore and . 489 crore respectively on Wednesday, according to provisional data.  The broader market also ended firm with gainers outnumbering advances in the ratio 1,849:894 on the BSE as investors lapped up mid- and small-cap shares, which are considered inexpensive. "Valuations in India are cheap, with the price-to-book ratio at one standard deviation below its average. This is similar to 2009 levels, but the situation in the world is not as bad now as it was then," said Jonathan Garner, chief Asia and emerging markets strategist at Morgan Stanley on the sidelines of an investor conference.  Garner said the market has priced in a bearish scenario and expects fund inflows to improve over the second half of this year. "We believe that global concerns will ease out, making the market attractive at cheap valuations. We expect a 'W' shaped recovery. The FII outflows seen in the last two months are a result of modest repositioning by some hedge funds. The structurally overweight funds are still holding their positions," he said.