RBI surprises, but time to exercise caution

The BSE Sensex crossed 30,000 for the first time to hit an all-time high of 30,024.74 in early morning trade on Wednesday after the Reserve Bank of India (RBI) surprised the market by a 25 basis point (bps) cut in repo and reverse repo rate.

Though the Sensex subsequently fell below 30,000, it was still trading 1 per cent higher than Tuesday, or 313.36 points at 29,907.09 at 10:15 am.

Wednesday's cut by RBI may have come as a surprise to the market, but the general expectation was that the ball is now in the RBI's court to cut rates and boost economic growth.

It gives the indication that the government didn't have the tool or the ammunition to bolster growth in the economy and it was at the mercy of RBI to kick-start the growth.

For long, the government wanted RBI to cut rates but the central bank did not bow down to the demands. Wednesday's cut, of course, would give some respite to the government.

But D-Street is not getting carried away as valuations are already stretched. For the market to rise further it would depend on the FII flows that have been the backbone of the Indian equity market.

In fact, today's cut is likely to keep the money tap flowing. Though FII flows have been positive, India has not received much flows as global investors are cautious on the country. This is because between 2007 and 2013, India disappointed and saw a weak currency.

Year-to-date, India has been the second best market behind Russia among MSCI Emerging Market Index, gaining 12 per cent. Experts see the Indian market rising at best 10 per cent from the current levels.

One thing is for certain: the Indian stock market is not a runaway market, and looking at current valuations, there are more chances of it consolidating. The positive of today's cut is that even if the market remains range bound, it may not see a sharp correction. One has to tread cautiously.