Global markets went on a celebratory spree with the emerging market currencies and equities registering impressive gains on Thursday after the US Federal Reserve surprised the financial market participants by maintaining status quo on its multi-billion-dollar monthly asset purchase programme.
The Sensex scaled above its psychological 20K level to close near its three-year high while the rupee appreciated over two per cent to its one-month high against the US dollar as foreign institutional investors (FII) pumped in a record `3,543.84 crore into the equity market, according to provisional figures. The Sensex surged 684.48 points, or 3.43 per cent, to end the day at 20646.64, the highest closing level since November 2010 and just 360 points away from its all-time high. The Nifty gained 216.10 points, or 3.66 per cent, to close at 6115.55. Meanwhile, the rupee closed the day at 61.77 to the US dollar as compared to its previous day’s close of 63.38 per dollar.
“While this move provides some temporary respite for the market, it will lead to prolonged market uncertainty as investors recalibrate expectations towards a tapering announcement during the next two FOMC meetings on October 29-30 and December 17-18,” said Lee Heng Guie, regional head of economic research, CIMB, an ASEAN investment bank.
“Postponement of tapering will provide time for making adjustments to the balance of payment (BoP) and will make the Indian economy more attractive from the current slowdown phase. The rupee is likely to stabilise at 58-61 levels and the Reserve Bank of India (RBI) is likely to slowly exit the temporary liquidity measures implemented to support a falling rupee. However, we do not expect any rate action in the RBI’s next policy,” commented Kruti Shah, analyst at Karvy Stock Broking.
Ever since Mr Bernanke hinted about an early exit from its quantitative easing programme, emerging market equities and currencies witnessed one of their worst sell-off as global investors started pulling out funds from these markets. The latest decision by the US Federal Reserve came in as a major relief to investors, which could also be gauged by the fact that India’s volatility index, also known as the fear index, that measures investors’ expectation about near-term volatility, dropped 11.52 per cent on the National Stock Exchange (NSE).
On Thursday, emerging market currencies gained the most following the Fed move. The Indonesian rupiah appreciated by almost 4.21 per cent followed by the Malaysian ringgit and the Indian rupee, which gained 2.62 per cent and 2.36 per cent respectively. “Investors are expecting more inflows on this step and are now looking forward to the RBI monetary policy on Friday. Banking stocks were the star performers of the day, on hopes that the RBI would ease some of the liquidity curbs it had placed in July to protect the rupee,” commented Abhishek Goenka, chief executive officer, India Forex Advisors.