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Indian shares made a strong rebound on Wednesday, with investor confidence boosted by the recovery in the economy. But risks from the Omicron coronavirus variant lingered, and analysts feared the US Federal Reserve’s signal of tighter monetary policy may drain foreign liquidity.

The BSE Sensex rose 619.92 points, or 1.09%, to 57,684.79. The Nifty gained 183.70 points, or 1.08%, to 17,166.90. In the Asia-Pacific, South Korea’s Kospi advanced 2.14%, and Hong Kong’s Hang Seng rose 0.78%.

According to Binod Modi, head-strategy, Reliance Securities, domestic equities staged a strong comeback during the day on strong cues from other Asian markets. Also, steady GDP growth in the September quarter and encouraging fiscal deficit data lifted investor sentiment despite continued uncertainty over Omicron.

The economy expanded 8.4% in the September quarter, surpassing its pre-pandemic size, as the vaccination drive picked up pace and services returned to normal after the disruptions caused by the devastating second wave of covid in the June quarter. The government’s fiscal deficit works out to 5.47 trillion, or 36.3% of the budget estimates, at the end of October, data released by the Controller General of Accounts on Tuesday showed.

“Concerns with regard to the spread of Omicron and effectiveness of vaccines against it have weighed on investors’ sentiments. However, any positive development with regards to Omicron can generate huge buying interests at these levels. Further, (Federal Reserve chairman Jerome) Powell’s recent comment about faster tapering of the bond-buying programme in the backdrop of sustained elevated inflation may weigh on sentiments," Modi said.

US central bankers are slated to discuss this month whether to end their bond purchases a few months earlier than anticipated, Powell said on Tuesday, pointing to a strong economy, stalled workforce growth and high inflation that is expected to last into mid-2022, Reuters reported.

The Fed action may dent foreign institutional investors (FIIs) money flow into Indian equities, which has slowed in the last few months. FIIs sold Indian equities worth around $2 billion last week on concerns of the new covid variant while elevated valuation risks of Indian equities persist.

Naveen Kulkarni, chief investment officer, Axis Securities, said, “Volatility may continue for some more time, as the direction of the new variant, oil prices, and dollar index will further drive market fundamentals. FIIs are net sellers in the equity market, especially in the past two weeks, and DIIs are consistently providing support. With every FII selling, here onwards, DIIs support will be critical for the market."

Markets are likely to look for directions from the Reserve Bank’s monetary policy review scheduled next week.

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