Indian markets surged to their highest level since January 2011 after Reserve Bank of India (RBI) Governor Duvvuri Subbarao said in Germany that he will take ‘easing inflation numbers’ into account while taking future monetary policy decisions. The markets interpreted this to mean that an interest cut was all but certain on June 17, when the central bank undertakes its mid-quarter review of monetary policy. In the last review on May 3, Subbarao’s tone was relatively hawkish and the apparent change reinforced the widespread belief that a rapid easing in monetary policy was likelier, more so after the main inflation gauge dropped below RBI’s comfort zone of 5% according to data released on Tuesday.
The rally by the benchmark indices was led by rate-sensitive sectors such as banking and auto. The Sensex surged 490 points (2.49%) to 20,212, the highest closing since January 2011. The broader NSE Nifty rallied 151 points (2.52%) to 6,146.
The gains from Wednesday’s trade made up for Monday's steep losses, which had been sparked by the surge in trade deficit in April leading to concerns that the current account deficit could spiral out of control. Those concerns still remain, but a more optimistic scenario appears to have come to the fore, at least for now.
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