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Bank of India Got New Liquidity Updates - Prices Up to All-time Highs

By SiliconIndia  |   Thursday, 18 May 2017, 09:21 Hrs
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The Nifty 50 Indian benchmark equity bourse surged to a fresh all-time high on Tuesday after a robust start to the week.  Prices continue to hit fresh all-time highs, despite a recent change by the bank of India to a hawkish monetary policy.  Tuesday’s rally marked three years since the BJP’s victory in the general Indian elections.  The index hit its fresh record high of 9,474.45 in trade.



The Bank of India Introduces New Liquidity Tools



In a recent announcement, the Reserve Bank of Indiasaid that they will introduce a new monetary policy tool in FY17/18 to better manage excess cash in the system.  The new cash flow tool, has generated liquidity for forex trading and is referred to as theStanding Deposit Facility (SDF) will provide banks with the ability to absorb excess cash without having to provide lenders collateral in exchange.  The SDF will mostly replace the Market Stabilization Scheme, which is a tool that is used to mop up excess liquidity by using bonds issued outside the government’s regular issuance.Last month the Reserve Bank of India surprised markets with the start of the tightening cycle.  It hiked the reverse repo rate 25 basis points to 6.0% but left the repo rate steady at 6.25%. 



The move to higher interest rates is a reflecting of growing inflation along with growth.  Growth in the Indian economy is spilling over into equities, and investors are using this opportunity to move into riskier assets such as stocks. 



Technicals



Prices broke out to all-time highs and continue to climb on solid volume which is very important when a market breaks out.  Strong volume shows that the consensus believes in higher prices, and the move is not coming because of a lack of liquidity.  Prices had been forming a bull flag pattern over the past few weeks, which is a consolidation pattern where there is a pause that refreshes.  The refresh has now occurred and prices will continue to move higher to find a new range.





Support on the Niffy 50, is seen near the bottom of the bull flag consolidation pattern near 9,280.  Additional support is seen near the 50-day moving average at 9,180. 



Momentum on the Nifty 50 has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the spread (the 12-day exponential moving average minus the 26-day exponential moving average) crosses above the 9-day exponential moving average of the spread. The index moved from negative to positive territory confirming the buy signal. The MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices for the Nifty 50. 



The relative strength index (RSI) which is a momentum oscillator that measures accelerating and decelerating momentum, along with overbought and oversold levels, surged higher, which reflects accelerating positive momentum. Resistance is seen on the RSI near the 80 level, which means momentum can still climb. The only caveat is that the current reading of the RSI of 71, is above the overbought trigger level of 70 and could foreshadow a correction.



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