Mumbai: Indian stocks on Thursday joined a global rally fuelled by hopes of an impending policy rate cut in the US, driving benchmark indices up by over 1%.

The BSE Sensex closed at 39,601.63, up 488.89 points or 1.25% while the 50-share Nifty index ended at 11,831.75, up 140.30 points or 1.2%. Markets in Japan, China, Hong Kong and Australia were up nearly 1-2%.

The US Federal Reserve on Wednesday decided to hold key interest rates steady in its monetary policy and hinted at a cut in rates in July. Local shares surged as the Fed move is likely to boost FII inflows to emerging markets including India, critical at a time when domestic liquidity is not significant.

The Fed signalled it was ready to lower interest rates for the first time since 2008, citing “uncertainties" that have increased the case for a cut as officials seek to prolong the near-record US economic expansion. While chairman Jerome Powell and fellow central bankers left their key rate in a range of 2.25% to 2.5% on Wednesday, they dropped a reference in their statement to being “patient" on borrowing costs and forecast missing their 2% inflation target yet again.

The shift followed attacks on the Fed by President Donald Trump for not doing more to bolster the economy and a Bloomberg report on Tuesday that the president had asked White House lawyers earlier this year to explore options for demoting Powell from the chairmanship.

Analysts said the markets gained momentum as dovish commentary from the US Fed boosted sentiment while there was short-covering in derivatives positions ahead of futures and options (F&O) expiry of June series.

Vinod Nair, head of research at Geojit Financial Services Ltd said the markets were concerned that the government has not yet provided any hint or relief to the slowing economy. “On hearing a series of meetings by PM and FM to draw a road map for 100-day agenda and budget provided confidence to the market. Additionally, the GST Council is likely to meet and review its position. Also, a relief rally in the global market given the dovish view by the Fed supported the domestic market," he added.

According to Rusmik Oza, head of fundamental research, Kotak Securities Ltd, three reasons drove markets rally. “Fed’s dovish stance, investors’ expectations that the GST Council meet may decide on rationalization of a few taxes which will boost sectors like auto, and short-covering due as F&O expiry is close by were key drivers," said Oza.

(Graphic: Naveen Kumar Saini/ Mint)
(Graphic: Naveen Kumar Saini/ Mint)

However, Oza is cautious that foreign institutional investor (FII) inflows may increase only if the Fed cuts interest rates as expected. Higher interest rates in the US generally lead to an outflow of foreign funds from emerging markets like India considered to be riskier assets.

Till date this year, FIIs have been net buyers of Indian shares worth $11.71 billion, pumping in $11.71 million in June so far. In contrast, DIIs have sold shares worth 10,985.21 crore this year but bought 267.18 crore this month. In 2019 so far, in dollar terms, Sensex has gained 10.32% while the MSCI World and MSCI Emerging Market indices have risen 14.74% and 7.51%, respectively.

“Global cues have also played into the RBI’s hands; easing US yields, a dovish US Fed and cautious ECB, lower the hurdle for the Asian central banks, including India, to embark on further easing. Oil prices have moderated from recent highs. Notably, the current bout of softening global yields is different from the last in 2012-2013, with regards to how India is placed," said Radhika Rao, an economist at DBS Bank. However, she added that apart from policy easing, ensuring financial stability will be key.

The rupee gained on Thursday after the dollar declined against all major peers following Fed’s dovish stance. The rupee ended at 69.44 a dollar, up 0.38%.

Ravindra Sonavane and Bloomberg contributed to the story.

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