Mumbai, Sept. 19: The sensex surged almost 700 points and the battered rupee rallied by 2.54 per cent against the dollar as a wave of euphoria and relief rippled through the markets today after the US Federal Reserve decided to press on with its $85-billion-a-month stimulus package it had threatened to unwind.
The unexpected decision announced by Fed chief Ben S. Bernanke gave RBI governor Raghuram Rajan — due to unveil his maiden monetary policy tomorrow — a little more elbow room if he wants to roll back some of the money-draining measures his predecessor had announced in July to prop up the rupee.
The sensex surged to a 34-month high at 20,739.69 before settling at 20,646.64, up 684.48 points or 3.43 per cent. It was the highest close for the index in almost three years (since November 10, 2010). As a result, investor wealth swelled by over Rs 1.63 lakh crore.
The bullish undertone in the equity markets rubbed off on the rupee, which soared 161 paise and closed at a one-month high of 61.77 against the dollar.
On the inter-bank foreign exchange market, the rupee started strong at 61.70 to the dollar and moved between 61.64 and 62.10, before ending at 61.77, a level not seen since August 16. The gain of 161 paise was the biggest since August 29, when it rose 225 paise or 3.27 per cent.
Investors from London to Tokyo, and from Istanbul to Jakarta celebrated the Fed’s decision that triggered a surge in world stocks and bond prices.
Benchmark indices in Hong Kong, Japan and Singapore rose by 1.67 to 1.81 per cent. Indonesia, another country that was dreading the Fed taper, led the gains in the region, rising 4.5 per cent.
But if the Fed delivered its surprise late Wednesday, the State Bank of India left analysts slack-jawed by taking the unprecedented decision of raising its lending and deposit rates a day before the monetary policy review.
Home and car loans will now cost more. The bank said the decision was a result of the severe liquidity shortage that had ratcheted up its cost of borrowings.
The Fed’s decision means that emerging markets will not have to live in fear that foreign investors will start sweeping money off the table anytime soon. The prospect of steady inflow of dollars will not only underpin stocks but also diminish concerns about funding the yawning current account deficit (CAD) which rose to $88.2 billion in March, or 4.8 per cent of the GDP — a level that has never been seen before.
The Fed may start “tapering” its bond purchases later this year but, for now, the spectre of dollar outflows has vanished.
“The Federal Reserve announcement of not tapering has come as a significant positive surprise for markets. For the time being, it appeases concerns of volatility in global capital flows into India…. For now, incrementally there are positive developments for cyclical sectors that had been heavily beaten down in recent months’’ Lalit Thakkar, managing director, Angel Broking, said.
Investors were left wondering whether the current rally would hold. Experts said much would depend on what the RBI does tomorrow.
They caution that newbie investors should stay away from the markets because a few macro-economic challenges loom.
The economy shows no sign of shuddering to life, inflation remains a concern at 6.1 per cent and the compulsions of an election year throw up their own demands.