Market reaction to CRR cut too rosy, says Udayan

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The stock market reacted positively to the monetary policy. The Nifty crossed the hump of 5,100 shortly after the policy. The Reserve Bank of India (RBI) cut the cash reserve ratio (CRR) by 50 basis points.

Volumes were high today and the market breadth was quite positive.

Udayan Mukherjee, managing editor of CNBC-TV18 says, today's stock market reaction is probably too rosy. "That tells you that the market is slowly coming into the grips of momentum and a bit of euphoria. So, maybe the weaker hands are beginning to get in," he adds.

According to him, the rally could well extend, but he thinks the market is getting into the last part of this leg of the rally as euphoria seeps in.

Also read: Correction may set in anytime, warns Ambareesh Baliga

Below is the edited transcript of his comments on CNBC-TV18. Also watch the accompanying video.

It's been a big move. The way the stock market has reacted today is at complete variance with how the bond market has reacted. That tells that the stock market is slowly, but surely getting into the grips of euphoria.

The rally, which started at 4,500, was born out of complete pessimism. Post 4,800, some people might have joined into that party. There were still lot of skepticism, but I think the number of conversions into optimists and bullishness is probably growing with every passing day now.

While we may not be there yet, I think we are now getting to that heady state into the market where the stock market is reacting to positives where there are probably not many positives to latch onto. Surely, more liquidity is good. But I don't think today's growth problem is a liquidity problem like it was in 2008.

The credit policy makes three important points. One, it clearly says that the CRR cut is just a liquidity event and not a monetary policy signal. It also explicitly says that interest rates or repo rates will not come down till there is fiscal consolidation. That means there is no chances of it before the budget and then depending on the union budget repo rates will go down or not.

The Reserve Bank is explicitly saying that the CRR cut does not mean that rate cuts should follow and that rate cuts will have to wait for fiscal consolidation to happen in the budget.

The bond yields were 8.08%, when the monetary policy came in. They are now at 8.22%. That's a significant 13-14 bps swing, on the opposite side what the stock market has done.

I think today's stock market reaction is probably too rosy. That tells you that the market is slowly coming into the grips of momentum and a bit of euphoria. So, maybe the weaker hands are beginning to get in.

People who are stubbornly short, maybe just cutting out now as 5,100 gets crossed. So technicals are at play. The rally could well extend, but I think we are getting into the last part of this leg of the rally as euphoria seeps in.