Rupee strengthens, bond yields dip; but domestic indicators still dismal

Euphoria gripped the markets on Thursday as stock indices surged, the rupee strengthened and bond yields dipped, on the surprise announcement of the Ben Bernanke-headed U.S. Federal Reserve that it would delay the winding down of its stimulus programme.

While the rupee closed at 61.77 per dollar compared to its close of 63.38 on Wednesday, the BSE 30-share sensitive index (Sensex) soared by 684.48 points to close at 20646.64. The rupee also touched an intra-day high of 61.64. In the bond market, the yield of benchmark 10-year Government Securities (G-Sec) dropped to 8.14 per cent before closing at 8.19 per cent, compared to its previous close of 8.37 per cent.

The 10-year G-Sec has rallied 85 basis points from the peak of nine per cent in mid-August. Stock markets rallied in the hope that the decision by the Federal Reserve would provide a cushion for RBI Governor Raghuram Rajan when he announces the Central bank’s mid-quarter review of monetary policy on Friday.

“Domestic economic indicators are yet to indicate complete turnaround. The rupee, even at today’s improved level, is weaker by over 12 per cent compared to its 55 per dollar average,” said Arun Kejriwal, a Mumbai-based analyst.

Reuters adds:

Turkey’s lira and India's rupee rose 2 per cent on Thursday and their stock markets surged as the Federal Reserve’s surprise decision to sustain its monetary stimulus granted a lifeline to embattled emerging markets.

The BRICS — Brazil, Russia, India, China and South Africa — and other emerging countries have complained in the past few months that the threat of the Fed running down the amount of new cash it is pumping into the economy each month is hurting their economies.

But the U.S. central bank’s announcement on Wednesday that it would maintain its ultra-easy policy for now is expected to keep funds flowing into the high-yielding markets where investors have been putting the cheap Fed cash.

Even Armenia, whose economy depends heavily on aid, took advantage of the Fed surprise, selling a 7-year dollar bond at initial price thoughts of around 6.375 per cent. Brazil, India, Indonesia, Turkey and South Africa — dubbed the Fragile Five because they depend heavily on foreigners buying their stocks and bonds to finance their current account deficits — all enjoyed a market rebound on Thursday.

“We can assume this rally is going to last for some time, probably at least a few weeks,’’ said Murat Toprak, emerging FX strategist at HSBC. Market expectations of when the U.S. central bank will start scaling back stimulus have now shifted to December.

Perceptions that the U.S. interest rates could stay low for longer were reinforced by news from the White House that noted dove Janet Yellen was the front-runner to take over the Fed when Ben Bernanke steps down in January.

The lira rose nearly 2 per cent, and the rupee spiked up by more than 2 per cent.

India could enjoy a 0. 5-percentage-point boost to its economic growth in the near-term, thanks to the Fed, the Finance Ministry's top economic adviser told Reuters.

The rand fell nearly 1 per cent, dropping from 4-month highs set on Wednesday, ahead of an expected no-change rate decision.

Among hefty gainers, Turkish stocks soared more than 7 per cent and Russian stocks jumped 4 per cent.

That followed overnight gains of more than 4 per cent in Indonesian stocks, 3 per cent in India and 2.5 per cent in Brazil.

South African stocks rose 2 per cent to record highs.

Emerging stocks are still in the red for the year but have trimmed 2013 losses to less than 3 per cent and reversed most of the fall seen since May, when talk of U.S. monetary policy tightening started.

Emerging European stocks leapt nearly 5 per cent to six-month highs.

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