RBI rate hike sparks rally

Tue, 29 Oct Closing

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Indian equity markets began the day's proceedings on a cautious note. But post the monetary policy of the RBI, buying activity across index heavyweights intensified causing the indices to scale higher. This momentum was maintained in the final trading hour as well and the indices closed well above the dotted line. While the BSE-Sensex today closed higher by 359 points, the NSE-Nifty closed higher by 120 points. The BSE Small Cap and the BSE Mid Cap also did well and gained around 1% each. Gains were largely seen in banking, metals and auto stocks.

As regards global markets, Asian indices closed mixed today while most European indices have opened in the green. The rupee was trading at Rs 61.39 to the dollar at the time of writing.

The Reserve Bank of India (RBI) hiked the repo rate yet again by 25 bps to 7.75% in its second quarter review of monetary policy for FY14. The repo rate is the rate at which the central bank lends money to commercial banks. Further, it left the cash reserve ratio (CRR) unchanged at 4%.

The hike is in line with the central bank's hawkish stance given high levels of both wholesale and consumer price inflation. But few things did bring respite.  The initial signs of recovery and stability have been witnessed in the foreign exchange market. Steps towards curtailing current account deficit are gradually yielding results. This enabled RBI to roll back the tightening measures and enhance liquidity into the system. Hence, the MSF rate was cut down to 8.75%. With these measures, the MSF rate and the bank rate now stand recalibrated to 100 bps above the repo rate.

Most pharma stocks closed firm today with the key gainers being Biocon, Sun Pharma and Cipla. As per a leading business daily, Sun Pharma appears to have addressed the issues raised by the US FDA with respect to Caraco's manufacturing facility. It must be noted that trouble brewed at Caraco's Michigan facility in 2009 when the US FDA declared that it flouted good manufacturing practices (GMP) norms. Accordingly, in that year, Caraco entered into a consent decree with the regulator. After corrective measures were put in place, in 2012, the US FDA notified that Caraco could resume manufacturing operations at the plant. Some minor observations were made by the FDA since then. But Caraco appears to have addressed the same. This is a positive for Sun Pharma whose US revenues came under pressure when Caraco first courted trouble with the US FDA.

The US regulator in recent times has become quite stringent with respect to GMP norms followed by generic companies. Most of the domestic pharma companies have come under the US FDA scanner. While some have been able to resolve their issues speedily, others such as Ranbaxy have faced much more serious issues. What is more, the regulator has also begun to conduct surprise checks on plants. This means that domestic pharma companies will have to step up efforts to make sure their plants are compliant so that business does not get hampered going forward.