The BSE Sensex surged over 3 per cent on Thursday with the benchmark index marking its highest close in nearly three years, led by banks, after the U.S. Federal Reserve surprised the markets by sticking to its stimulus plan.
The NSE bank index jumped 6.75 per cent on hopes that after the Fed move the Reserve Bank of India would have greater flexibility if it wants to gradually roll back some of the cash tightening steps it initiated since mid-July.
RBI Governor Raghuram Rajan is widely expected to keep the policy rate and the cash reserve ratio unchanged in his monetary policy review on Friday, according to a Reuters poll. The poll, which was conducted before the Fed decision, also expects the July cash tightening steps to be retained.
Analysts add that the Fed decision may lead to a resurgence of much needed portfolio flows into emerging markets like India. Foreign institutional investors have already bought more than 75 billion rupees worth of Indian shares over the previous 10 sessions.
"RBI can withdraw fully or partially some of the extraordinary liquidity tightening it had done to support INR, including ceiling on LAF and steep hike in MSF," said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.
Speeding up financial sector reforms, too, would act as confidence and growth boosters, Oswal added.
The Sensex surged 3.4 per cent, or 684.48 points, to end at 20,646.64, after earlier rising as much as 3.9 per cent, marking its highest level since November 11, 2010.
The broader Nifty rose 3.7 per cent, or 216.10 points, to end at 6,115.55, marking its highest close since May 2013.
Bank shares surged on hopes the Reserve Bank of India, in its policy review on Friday, would ease some of its emergency cash tightening steps.
Among private sector banks, ICICI Bank Ltd rose 6.5 per cent and HDFC Bank Ltd was up 5 per cent.
Among banks dependent on wholesale deposits, Yes Bank Ltd jumped 22.4 per cent while Indusind Bank Ltd rose 5.4 per cent.
Among state-owned banks, State Bank of India Ltd rose 8 per cent while Bank of Baroda Ltd surged 8.8 per cent.
Shares in state-owned oil retailers also gained as a rally in the rupee against the dollar was seen easing concerns about higher cost of crude oil imports and dollar debt, dealers said.
Hindustan Petroleum Corp Ltd gained 3.6 per cent, Bharat Petroleum Corporation Ltd surged 6.5 per cent, while Indian Oil Corp rose 1.7 per cent.
GMR Infrastructure Ltd rose 5.6 per cent, totalling a gain of 10.3 per cent in three sessions, after the company sold its majority stake in a highway construction unit for about $35 million to reduce its debt.
Ranbaxy Laboratories Ltd gained 4.7 per cent on value buying, totalling a gain of 10 per cent in three consecutive sessions, after a ruling from the U.S. health regulator on its Mohali factory triggered the worst single-day fall in its stock on Monday, wiping off a third of its market value.
However, among decliners, Tech Mahindra Ltd fell 1.5 per cent after shares turned ex-dividend on Thursday.
Rupee at over one-month high after Fed meeting
The rupee surged 2.6 per cent on Thursday, hitting its highest in nearly five weeks, as the U.S. Federal Reserve's decision not to dial back its easy money policy is expected to provide a reprieve to the Reserve Bank of India (RBI) in its policy making.
The rupee, which was among the top winners in Asia after the Fed move, and the Indonesian rupiah stand to gain the most if foreign funds return to riskier assets in the wake of the Fed's surprise decision. Both bore the brunt of the recent sell-off in emerging market currencies since the Fed bank signalled in May that it may begin tapering stimulus this year.
The BSE Sensex surged to its highest close in nearly three years, while bonds rose to their highest in a month.
The Fed's move also means that the RBI will have greater flexibility if it wants to roll back some of the cash tightening steps it initiated since mid-July to stabilise the plunging rupee.
The RBI's decision to bump up its emergency funding rate by 200 basis points to 10.25 pct and cap banks' borrowing from it roiled bond markets and pushed up corporate borrowing costs, adding to strains on the already slowing economy.
State Bank of India, the country's largest lender, on Thursday raised its base rate, or the lowest rate at which it lends, by 10 basis points to 9.80 per cent.
"A delay in the tapering agenda paves the way for the RBI to relook at the liquidity tightening measures put in place in July and possibly ease the restrictions. With the rupee already halving the losses seen from May to August, there might not be sufficient justification to keep those measures to place," said Radhika Rao, economist at DBS in Singapore.
"The policy commentary could adopt a move dovish and growth-supportive stance," she said, referring to the RBI's policy announcement after its meeting on Friday.
The partially convertible rupee closed at 61.77/78 per dollar compared to its close of 63.38/39 on Wednesday. The unit rose as high as 61.64, its strongest since August 16.
Bonds rallied with the benchmark 10-year yield falling to 8.14 pct, its lowest since Aug 8. It closed at 8.19 per cent, down 18 bps. The Sensex and the Nifty closed more than 3 per cent up.
"It is too early to say that everything is rosy for INR as global factors have played in favor of INR. We have to wait for tomorrow's policy to take a more concrete view," said Paresh Nayar, head of fixed income and currencies trading at First Rand Bank in Mumbai.
RBI Governor Raghuram Rajan will detail monetary policy on Friday and is widely expected to keep the policy rate and the cash reserve ratio unchanged, according to a Reuters poll. The poll, which was conducted before the Fed decision, also expects the July cash tightening steps to be retained.
A resurgence of inflation to a six-month high in August has muddied waters for the central bank, which has been battling a falling rupee and trying to revive the economy with growth having slumped to a decade low.