Indian equities surged on Monday as the rupee strengthened because of a narrowing trade deficit in November while global investors showed caution on the eve of the Federal Open Market Committee (FOMC) meeting.

The Sensex ended at 36,270.07, up 307.14 points or 0.85% while the Nifty was at 10,888.35, up 82.90 points or 0.77%.

“Markets extended gains led by a strong rupee backed by narrowing trade deficit and inflow of foreign funds. A drop in oil prices, strengthening of the rupee, and a pick-up in domestic macros are providing a positive momentum to the market," said Vinod Nair, head of research, Geojit Financial Services Ltd.

Analysts said foreign flows into Indian stocks and bonds have also improved this month, boosting the local currency. The rupee closed at 71.55 a dollar, up 0.48% from Friday’s close of 71.90 after India’s trade deficit narrowed from a month ago. In November, the trade deficit was at $16.67 billion from $17.13 billion last month.

However, the appreciation of rupee and high crude prices have dragged equities in this year after a strong rally in 2017. In December so far, the rupee has weakened 3.22% while crude oil prices rose 3.53%.

E.A. Sundaram, chief investment officer, equities, DHFL Pramerica Mutual Fund said, “While corporate earnings seem to be in a recovery mode, markets continue to be volatile as trade impasses, volatility in crude play their part. Falling crude and softening of yields (domestic) do augur well for the economy and should help shore up investments and profitability as well.’’

Meanwhile, global markets were mixed as investors remained cautious ahead of the US Federal Reserve meeting starting Tuesday. As the US central bank is widely expected to raise interest rates this time, the focus will be mainly on commentary by the US central bank on number of hikes estimated in 2019. The Bank for International Settlements (BIS) said on Sunday that recent sharp sell-offs across global financial markets are probably the first of many, as investors adjust to a world of tighter monetary conditions and the threat of economic downturn. The BIS is an umbrella group for the world’s central banks and its reports are seen as an indicator of the thinking that goes on behind the closed doors of its quarterly meetings.

Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India Equity Strategist at Credit Suisse, said that as monetary conditions are expected to tighten at a time when global growth is surprising negatively, volatility is likely to remain high in global markets in 2019 which may impact Indian equities.

“Indian equities would be affected too, particularly if equities globally see a compression in valuation multiples. However, the impact should be somewhat moderated, given that foreign investors have not been meaningful buyers of Indian stocks for the past three years and are now accounting for less than a third of trading volumes," he said.

Foreign institutional investors (FIIs) are net sellers of Indian equities in 2018 so far.

In this year, FIIs have sold Indian shares worth $4.55 billion but have bought $343 million in December. In 2018, domestic institutional investors (DIIs), including mutual funds and insurance companies, have bought 1.10 trillion while buying 610.15 crore in December so far.

Reuters contributed to the story.