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The Bombay Stock Exchange (BSE) building is seen in Mumbai in this May 22, 2006...
Wed, Jul 23 03:14 PM
By Saikat Chatterjee
MUMBAI (Reuters) - Financial markets rallied on Wednesday in relief the government had won a confidence vote which could lead to it reviving stalled reforms, with the rupee surging against the dollar and shares jumping more than 5 percent.
Stocks raced to their highest in a month and bond yields eased as the immediate political uncertainty faded.
But traders said gains, particularly in the fixed income market, might be short-lived due to concerns about inflation near 12 percent and a possible monetary tightening next week.
"The markets never like uncertainty, so in that sense the end of the political uncertainty has brought in a feel-good factor," said Arun Kejriwal, strategist at research firm KRIS
"The government now has an opportunity to push through some reforms but whether they will actually be able to do it, I am not too sure," Kejriwal said.
The government won a vote of confidence in parliament late on Tuesday, ensuring the survival of the ruling coalition and of a civilian nuclear deal with the United States.
The vote came after market close and on Wednesday the partially convertible rupee climbed 1.3 percent to a seven-week high of 42.18 per dollar, well above Tuesday's close of 42.73/74. It hit a 15-month low of 43.50 earlier in July.
At 1:57 p.m. the benchmark share index was up 5.5 percent and at its highest levels since June 20. It gained 12 percent in the four sessions leading up to the vote, but is still down 26.6 percent this year.
Notable winners were banking stocks, with the sub-index soaring as much as 10 percent on expectations the government would push on with long-awaited banking reforms blocked by its former communist allies. Leading private sector lender ICICI Bank gained more than 12 percent.
The capital goods index jumped 8 percent on the belief the government would now clinch a civilian nuclear deal and pave the way for more nuclear power plants.
FAMILIAR DEMONS
But analysts cautioned against too much euphoria, saying fundamental issues such as higher interest rates, slowing growth, and volatile oil prices would continue to haunt markets for now.
"It makes sense to look at markets on a case-to-case basis as the centre stage has shifted from politics to fundamentals such as earnings, inflation and oil," said Sanjeev Patkar, head of research at Dolat Capital.
In addition, the scope to push through hoped-for reforms in pension funds, insurance and possibly banking was small, given national elections are due by next May.
"Gains are likely to be short-lived as fundamentally nothing has changed in terms of economic realities," said Manoj Rane, country treasurer at BNP Paribas in Mumbai.
"Unless we see that changing for the better, these levels look toppish," he said, referring to stocks and bonds.
Annual inflation is expected to top 12 percent in mid-July on costlier commodities and strong demand in the economy, a Reuters poll showed. The data is due on Thursday.
After two surprise rate increases in June, many expect the central bank could either raise its key lending rate again on July 29, from 8.5 percent, or hike banks' reserve requirements.
The 10-year benchmark bond yield was at 9.04 percent, below 9.12 percent on Tuesday but still not far off a seven-year peak of 9.55 percent set earlier in the month.
The government sells 45 billion rupees ($1.1 billion) of treasury bills on Wednesday and 60 billion rupees of bonds on Thursday. Traders are nervous its spending commitments may see it borrowing more than anticipated before the fiscal year is out.
"The bond market is in a different world and unless oil prices drop sharply or cash is ample, yields will be pressured higher," said Parijat Agarwal, head of fixed income at SBI Mutual Fund who manages funds worth 150 billion rupees.
(Additional reporting by Narayanan Somasundaram in MUMBAI)
