A surprise rate cut decision by RBI governor Raghuram Rajan triggered a strong rally in the market with the sensex closing 729 points higher to 28,076, its biggest single-day gain in over five years. Across-the-board buying during the day led to 28 of the 30 sensex stocks closing higher, adding about Rs.1.80 lakh crore to investors' wealth as BSE's market capitalization zoomed past the Rs.100-lakh crore mark again. On the NSE, the nifty gained 217 points at 8,494.
Although the rally was across the board, rate sensitive stocks like banking & financial services, real estate, capital goods and auto stocks led the surge. A cut in interest rate by the RBI means banks can lower their rate of interest for lending which can lead to higher demand for loans for customers and companies, and hence better income and profit for these companies. Lower rates can also lead to higher demand for loans to buy cars and houses, while capital goods companies are likely to see lower interest outgo.
Dealers said the RBI's decision, on top of the falling crude prices globally , could put the Indian market in a sweet spot for the sensex to rally to new highs in the next few weeks. The day's rally on Dalal Street also discounted Wednesday's slide on Wall Street where the Dow Jones closed 187 points lower due to the falling crude prices.
The rally was also helped by strong FII buying with the data on the BSE showing a net inflow of Rs.1,738 crore.Domestic funds, on the other hand, were net sellers at Rs.527 crore. In addition to buying by FIIs and long-term investors, there was short covering by speculators who had earlier sold in anticipation of a slide in the market but rushed in to cut their losses when the market rallied.
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