Mumbai: Indian markets Tuesday put on a good show with the Sensex surging to a 3-year high and the rupee gaining the most in more than two weeks after the RBI enhanced liquidity in the banking system while marginally hiking the repo rate to curb price rises, as expected.
The markets were surprisingly resilient after RBI Governor Raghuram Rajan increased the key lending rate by 0.25 percent to contain inflation in continuation of his hard-line stance. Usually, repo rate hikes lead to selling in the stock market.
Rate-sensitive banking, auto and realty shares led the charge after the RBI cut the marginal standing facility (MSF) rate by 0.25 percent and doubled the borrowing limit of banks against their cash positions to 0.5 percent for both seven-day and 14-day repos.
Market participants seemed to agree with Rajan's argument that these steps would help strengthen the environment for growth by fostering macroeconomic and financial stability.
"Short-term rates are expected to respond positively to RBI's policy stance as the MSF rate cut and additional liquidity through term repo may reduce the overall cost of funds for the banking system," said Nimesh Shah, MD & CEO, ICICI Prudential Mutual Fund.
Some experts suggested that expectations of a 0.50 percent repo rate hike were built in the past few sessions and so a 0.25 percent rise was seen as a relief.
The benchmark 30-share Sensex shot up to an almost three-year high of 20,929.01, snapping a five-day losing trend, as financial stocks ICICI Bank, HDFC Bank, HDFC and SBI drove almost half of the index's gains.
In the currency market, the rupee bounced back 21 paise, logging its biggest gain in more than two weeks, to close at 61.31 against the dollar.
The rupee got a boost as stock market investors cheered the Reserve Bank's steps. Fresh dollar sales by exporters amid sustained capital inflows also supported the local currency.
The local currency has come a long way since slumping to record low of 68.85 against the dollar on August 28.
