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After opening the day on a positive note, the Indian stock markets continued to trade in the green. Sectoral indices are trading firm with stocks from the telecom, capital goods and power sectors leading the gains.
The BSE Sensex is trading up 133 points (0.5%) while the NSE Nifty is trading up by 42 points (up 0.5%). The BSE Mid Cap index is trading higher by 0.4% while the BSE Small Cap index is trading 1% higher. The rupee is trading at 66.31 to the US$.
Stocks in the automobile space are trading on a positive note with Tata Motors and Tube Investments leading the gains. As per a leading financial daily, tractor sales volumes saw a spike in the month of April 2016.
It was noted that tractor sales were aided by improving sentiments led by a favourable monsoon forecast. India's largest tractor company Mahindra & Mahindra (M&M) posted 22% YoY growth in sales for the month. Further, Escorts' tractor sales grew by 10.3% YoY in volumes.
The trend in tractor sales volumes is considered as a barometer to measure sentiments in rural markets. As per experts, sales in the months of April and May usually have higher offtake due to filling up of inventory.
This development hints that the subdued rural demand is gaining ground with the prediction of above normal monsoons. The Indian Metrological Department (IMD) forecasted the monsoons during the period July to September 2016 to be 106% of the long period average (LPA), averaged over the country, with a model error of ±5%. At 106%, this will be an above average monsoon.
Vivek Kaul, editor of Vivek Kaul's Diary, has written an insightful piece about why monsoons still matter so much for the Indian economy.
PSU banking stocks are trading on a firm note with Oriental Bank and Bank of Baroda witnessing maximum buying interest. State Bank of India (SBI) has lowered its lending rates based on marginal cost of funds by 5 basis points to 9.15% (one basis point is equivalent to one-hundredth of a percentage point).
With this reduction, the home loan interest rate for women borrowers has come down to 9.35%, while it now stands at 9.40% for the rest. Interest rates on car loans have also been reduced by 5 basis points as well. The new minimum lending rates are effective from the current month.
Last month, the lender had set the MCLR (Marginal Cost Lending Rate) at 9.20% after the Reserve Bank (RBI) cut repo rate by 25 basis points.
The introduction of the MCLR has been in effect since April 1, 2016. The MCLR mechanism is introduced to ensure effective transmission of policy rates. The RBI has suggested banks review their lending rates frequently, and reflect changes in their cost of borrowing.
MCLR is computed based on banks' marginal cost of borrowing, or incremental cost of funds. This is as against the computation based on the average cost of funds that banks have used so far.
What this means is that if a bank's cost of borrowing is 8% now but tomorrow the incremental cost of funds becomes 7.5%, the marginal cost of borrowing for the computation purpose will be 7.5%, rather than the average of the two.
With this regime in place, a fall in deposit rates will be quickly reflected in the lending rates. Also, a rise in deposit rates would mean lending rates going up quickly too. In all, the process will mean quick transmission of policy rates by banks.
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