Rupee, stocks at ease despite quantitative easing cut

Foreign fund inflows help market bounce back; IT & Reliance stocks rally; Sensex breaches 21,000

The stock markets surged on Friday, primarily due to continued foreign institutional purchases, alleviating fears that inflows would dry up after the US Federal Reserve's stimulus rollback announcement on Wednesday.

Shares of software exporters led the Dalal Street rebound, after Thursday's decline, as the Fed move boosted expectations of a sharper recovery in the US. The sentiment also received a boost with Accenture's announcement it expected its consulting business to see a turnaround this financial year. Reliance Industries also aided the surge in the indices, after the government on Thursday allowed the company to charge higher gas prices from April.

The BSE Sensex rose 371.1 points or 1.8 per cent to close at 21,079.7. NSE's Nifty gained 111.3 points or 1.8 per cent to close at 6,277.9.

The rupee snapped its three-session losing spree on Friday. The domestic currency closed at 62.04 to the dollar on Friday, after opening weak at 62.41 a dollar, against the previous close of 62.12. NSE's information technology index rose 1.7 per cent, with Infosys gaining 1.1 per cent and Wipro surging 3.6 per cent. Reliance Industries closed at Rs 893.6, after gaining 4.6 per cent over the previous close.

Foreign institutional investors (FIIs) net bought shares worth Rs 990 crore on Friday, according to provisional data, after pouring in about Rs 2,200 crore the previous day.

Investors were relieved that FII inflows have not slowed despite the Fed's tapering of the bond buying programme.

"The rally today (Friday) shows markets are convinced that India is better prepared to deal with the QE tapering now than some months ago," said Rajesh Cheruvu, chief investment officer, RBS Private Banking. "The strong FII figures on Thursday also relieved the market."

The US central bank had on Wednesday announced a cut in its monthly $85-billion bond buying programme by $10 billion a month from January. This had sparked a moderate sell-off in Indian stocks on Thursday.

"The QE tapering announcement has sent a signal that the US economy is strengthening. This has improved the outlook for IT stocks," said Cheruvu.

Brokers and analysts warned against reading too much into the market strength seen on Friday, as the rally was also aided by short-covering. Volatility was expected to heighten in the week ahead, with the December futures and options series set to expire on Thursday.

But NSE's Volatility Index (VIX), a key sentiment indicator, pointed to smoother sailing in the near term. It slipped 3.4 per cent to 16 on Friday against the previous day's close. The drop in this gauge, which measures the market's expectations of near-term risks based on options prices, showed traders expect fewer risks in the market.