Increased liquidity propels Indian stocks to all-time high

The Reserve Bank of India (RBI) today revealed plans to increase liquidity in the economy, causing the country’s benchmark stock-index to soar to a record high. Bloomberg reported a 0.7% rise in the S&P BSE Sensex Index, with Tata Steel, up by 6.88%, the biggest winner. A number of mining, power and natural resources firms, including Coal India, NTPC and Oil & Natural Gas Corp (ONGC), also surged by several percentage points – with Sesa Sterlite, India’s biggest producer of aluminium and copper, hitting its highest point in three years.

In its second bi-monthly statement, RBI announced its decision to maintain the current policy repo rate (repurchase rate) at 8%, cash reserve ratio (CRR) at 4% and reverse repo rate at 7%, in order to counter inflationary pressures. Should disinflation increase faster than expected, according to the statement, RBI “will provide headroom for an easing of the policy stance.”

RBI also cut the statutory liquidity ratio (SLR) by 50 basis points, bringing it down to 22.5% of net demand and time liabilities (NDTL). As well as loosening restrictions for financial institutions, the move aims to weigh the funding requirements of lenders against the financing needs of the government – and anticipates potential credit growth. “The SLR cut is a signalling device about RBI’s dovish stance,” Bharat Rawla, Head of Equities at Macquarie Capital Securities, told Bloomberg. “Any improvement in inflation ahead of expectations can open the door for a rate cut.”