Sensex, bonds rally after RBI surprises with bigger rate cut

Mumbai: India`s stock markets reversed losses while the benchmark 10-year bond surged to its highest in more than two years after the Reserve Bank of India (RBI) cut interest rates by a bigger-than-expected 50 basis points and allowed for steady increase in foreign investment limit in government securities.

The RBI cut its policy interest rate to a 4-1/2-year low of 6.75 percent on Tuesday, in a move that, with inflation running at record lows, could help an economy in danger of slowing down.

Only one out of 51 economists and analysts polled by Reuters last week expected a 50 basis point cut while 45 expected the RBI to cut the repo rate by 25 basis points. The RBI has already eased the policy rate by 75 bps so far this year.

"Rate cut and moves on FII limits are key positives. The 10-year yield will test 7.50 percent and below," said Navneet Munot, chief investment officer at SBI Funds Management.

"Global volatility and redemption-led EM outflows, are weighing on stocks but India should outperform its EM peers in medium term," Munot added.

The benchmark 10-year bond yield fell as much as 17 basis points to 7.56 percent, its lowest since mid July 2013, after the rate cut while stocks reversed losses of as much as 1.2 percent.

The BSE Sensex was trading 0.92 percent higher after falling as much as 1.29 percent earlier in the session. The broader Nifty was up 0.85 percent after trading down 1.34 percent.

The rupee rose to 65.97 versus the U.S. dollar compared with its pre-policy level of 66.34.

Market participants said the RBI`s stance remains accommodative but future policy actions depend on banks transmitting the front-loaded rate cut and government doing its part on reforms.

The RBI will work with the government to ensure that the benefits of a rate cut is passed on by commercial banks through reductions in their lending rates, RBI Governor Raghuram Rajan said.

"It should have been a party on Dalal Street, but I think the market is still nervous, possibly in terms of further cuts on a backburner," said Gaurang Shah, vice president at Geojit BNP Paribas.

A 25 bps cut in December could be a possibility, but domestic data points have to be incrementally positive, Shah said.