Sensex Posts Biggest Rally in 7 Years As Traders Bet On RBI Rate Cut

The BSE Sensex closed 777 points higher on Tuesday, its biggest single-day point gain in nearly seven years. Markets staged a strong rally on hopes that Reserve Bank Governor Raghuram Rajan will announce an out-of-turn reduction in repo rate after Monday's Budget. Dr Rajan had last cut interest rate in September.

The rupee also rallied, rising to 67.86 per dollar, while bond yields inched lower for third consecutive day.

Bets of a rate cut gained momentum after Finance Minister Arun Jaitley retained FY17 fiscal deficit target at 3.5 per cent of GDP despite increasing expenditure for rural and infrastructure spending.

"The necessary condition for a rate cut has been met with fiscal deficit target retained at 3.5 per cent...That is increasing expectations of an inter-meeting rate cut in the market," said Anindya Dasgupta, treasurer at Barclays.

(Read: All Eyes on Raghuram Rajan After Arun Jaitley Passes Fiscal Test)

The absence of negative tax measures, such as status quo on the duration for applicability of long-term capital gains tax on equities, also helped Tuesday's rally, traders said. Gains also came after advances in Asian markets following China's monetary easing.

The sharp rise in Sensex and Nifty on Tuesday did not come as a surprise to analysts, as stock markets had witnessed a sharp selloff in the run-up to the Budget on concerns that fiscal deficit target would be relaxed for a second straight year.

Monday's Budget has also led to the clamour for a bigger rate cut in the coming months.

"Sticking to the fiscal deficit target for the moment as compared to expectations of missing the target is a big positive...We expect RBI to cut rates by further 50 basis points by mid-June," said Siddhartha Sanyal, India economist of Barclays.

Gains were led by rate sensitive banking stocks, which rallied 8 per cent. ICICI Bank, Punjab National Bank and IndusInd Bank were among the top Nifty gainers. Auto and realty stocks also witnessed buying interest.

The Sensex closed 777.35 points or 3.4 per cent higher at 23,779, while the Nifty advanced 235 points to settle at 7,222.