Big Ben sets off market surge

Sensex zooms to highest level in nearly three years, rupee strengthens 2.54%

Stock indices on Thursday surged to their highest level in nearly three years, led by banks, after the US Federal Reserve stunned markets by delaying plans to cut asset-purchase programme. The rise was in tune with global markets. The MSCI world share index, which tracks 45 countries, jumped 1.2 per cent to a five-year high, as large gains in Asian markets were matched by a one per cent jump in Europe's shares.

Compared with its previous close, the rupee strengthened 2.5 per cent, the same level of appreciation earlier seen on August 29, a day after the currency touched an all-time closing low of 68.83 a dollar. On Thursday, the rupee ended at a one-month high of 61.78 a dollar, against its previous close of 63.38.

The Sensex rose 684.48 points, or 3.4 per cent, to close at 20,646.64. The NSE Nifty ended the day at 6,115.55. The Sensex is now less than three per cent short of its all-time high of 21,206.77 hit in January 2008 and closing high of 21,004.96 (November 5, 2010).

Market players are still keeping their fingers crossed. Motilal Oswal Financial Services CMD Motilal Oswal said the market was driven by relief on the Fed move. "There was some relief when the Fed decided to continue with its bond-buying programme. There are hopes the Reserve Bank of India (RBI) will now ease liquidity," he said.

Gautam Trivedi, managing director & head of equities (India), Religare Capital Markets, also suggested the rise could be temporary. "The rise in the market is justified to the extent it has brought back optimism into the market. There has been large-scale short-covering," he said.

Foreign institutional investors (FIIs) were net-buyers to the tune of Rs 3,544 crore on Thursday, according to provisional exchange figures. Domestic institutions net-bought Rs 1,830-crore shares.

Equities will now look to RBI for its cues on Friday. "A rate cut is highly unlikely. We hope RBI's earlier liquidity-tightening measures will be reversed," said Oswal. "Everybody expects RBI to maintain the status quo. There will be no rate hike, either," agreed Trivedi.

The index tracking the banking sector - rising 6.78 per cent with falling yields seen as a positive for the stocks - was the best performer among BSE's 13 sectoral indices. Indices tracking the realty and capital goods sectors were up 5.34 per cent and 4.75 per cent, respectively. But those tracking the healthcare and information technology sectors were weak, as investors switched out of defensive plays and those that gain from a falling rupee. The IT index closed with a loss of 0.2 per cent.

The yield on government bonds, tracking the rupee's rise, fell sharply to a one-month low. The yield on the 10-year government bond 7.16 per cent 2023 ended at 8.19 per cent, compared with 8.37 per cent the previous day. It had ended at 8.16 per cent on August 8. There also are hopes that the marginal standing facility (MSF) rate might be cut by about 50 basis points from the current 10.25 per cent on Friday.

The Thursday closing value of the rupee was near a level last seen on August 16, when it had ended at 61.67 a dollar. The Indian currency was one of the best performers among Asian currencies after Fed's decision. It had opened at 61.84 on Thursday and touch a high of 61.65 and a low of 62.13 a dollar during intra-day trading.

"The positive outlook for the rupee will continue even on Friday, though RBI may not tinker much with its liquidity-tightening steps. RBI might reduce banks' daily cash reserve ratio (CRR) balance of 99 per cent (of requirement) to 90-92 per cent," said, Mecklai Financial Deputy CEO Partha Bhattacharya.

According to him, liquidity might not be eased much because the earlier moves - to offer banks the FCNR (B) window for dollar funds and raising banks' overseas borrowing limit of unimpaired Tier-I capital from 50 per cent to 100 per cent - would help inject liquidity into the country.

"Given the developments locally and internationally, the overall tone for the rupee is constructive and positive. The sentiment for the currency has turned better and, in all probability, the weakening that we saw a few weeks back are unlikely, unless there is a dramatic change in the international environment," said Hitendra Dave, managing director & head of global markets (India), HSBC.