RBI keeps rates unchanged

Thu, 16 Dec 01:30 pm

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Despite the RBI keeping rates unchanged, markets failed to see any enthusiasm. Currently, stocks from the IT sector are the only ones to prosper in a weak market, with TCS hitting its lifetime high. Stocks from the auto, consumer durables and capital goods indices all saw significant declines.

The BSE-Sensex is trading lower by around 42 points (down 0.2%), while the NSE-Nifty is down by about 24 points (down 0.4%). Stocks from the midcap and smallcap spaces are also witnessing selling pressure as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.6% and 0.4% respectively.

The anticipated monetary policy review was done today with the RBI keeping rates unchanged. This was in line with market expectations. The repo rate and reverse repo remained at 6.25% and 5.25% respectively. The cash reserve ratio also remained at 6%. The RBI decided to reduce the Statutory Liquidity Ratio (SLR) of scheduled commercial banks from 25% to 24% of net demand and time Liabilities. This will take effect from December 18, 2010. The central bank also decided to conduct open market operation for the purchase of government securities (g-secs) for an aggregate amount of Rs 480 bn in the next month. These two measures will help ease the tight liquidity situation in the country currently, post a number of big ticket IPOs, 3G and BWA auctions and advance tax payments.

With soaring sugar prices, India is getting ready to allow exports of around 500,000 metric tons of white sugar. This will help millers and farmers to cash in on the increase in realizations. Sugar stocks are all trading positive with big players including Renuka Sugars, Balrampur Chini and Bajaj Hindusthan all seeing gains. India is the number one consumer of sugar. The president of the Indian Sugar Mills Association stated that India is likely to have surplus sugar of 2 m tons for exports this year due to production in excess of local demand. Over the past 2 years, India actually had to import to meet its sugar needs. This was due to a drought in 2009 and a decline in cultivated area.

International sugar supply is currently at 20-year lows. This is after two seasons of deficits. Thus, world sugar markets are extremely volatile and exposed to price shocks. An increase in exports from India will help the country capture the increased global prices. This is at least until the new cane crop from Brazil hits markets in a few months.