Markets rally as rift between RBI, govt eases; global cues aid sentiment

Reserve Bank of India
Stocks rallied on Wednesday after the government moved to ease concerns over the independence of the Reserve Bank of India (RBI). Buzz that the government was mulling fresh steps to ease liquidity concerns triggered gains in the shares of non-banking financial companies (NBFCs) and banks. Also, positive global cues, following sharp overnight gains in the US markets, aided sentiment. 

After fluctuating between gains and losses for the better part of the day, the markets soared by over 1.5 per cent a few hours before close.  The Sensex gained 551 points, or 1.63 per cent, to end at 34,442. This was its highest close since October 17. The Nifty gained 188 points, or 1.85 per cent, to end at 10,386.

Market experts said the recent steps taken by the authorities to ease liquidity squeeze were helping asset prices.

"More than Rs 2 trillion worth of liquidity has come into the market because of the recent steps taken by the RBI and the government. That's a lot of liquidity and the asset prices will respond to it," said Ridham Desai, managing director at Morgan Stanley India.

In October, the RBI had announced open market operations (OMOs) worth Rs 360 billion to buy bonds from the secondary market. In November, it plans to buy another Rs 400 billion worth of OMOs. The first of such purchases, totalling Rs 120 billion, will take place on Thursday. Also, State Bank of India has announced it was buying bond portfolio of NBFCs worth up to Rs 450 billion. These measures have comforted the market, said experts. The 10-year bond yield closed at 7.85 per cent, marginally up from its previous close of 7.83 per cent. Market players said the statement issued by the government to defuse the tension with the RBI had helped market sentiment. 

The statement came after the rift between the RBI and the government was seen widening amid differences over wide-ranging issues such as the prompt corrective action framework, handling of bad loans, and the liquidity situation. The government has "nurtured and respected" the autonomy of the central bank, the Department of Economic Affairs said after market hours. "The statement by the government helped assuage investor concerns. It indicated the government respects the autonomy of the RBI and is willing to back off," said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services.

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