Ahead of the conclusion of the US Federal Reserve meeting, the stock indices moved up cautiously on Wednesday on the hope that the US Fed would limit the scaling down of its $ 85 billion monthly bond-buying programme and keep interest rates at lower levels. The bond-buying programme was introduced to stimulate the U.S. economy in the aftermath of the financial crisis.

Marginally lower

However, the rupee closed marginally lower at 63.38 a dollar compared to its previous close of 63.37 on Tuesday.

The BSE 30-share Sensitive Index (Sensex) ended at 19962.16, up by 158.13 points.Mid cap and small cap stocks also gained by 0.45 per cent and 0.08 per cent respectively on BSE.

On the National Stock Exchange, the 50-share Nifty was up by 49.25 points to close at 5899.45.

“As expected, the markets were range-bound, and did not show much volatility as traders and investors were anxiously expecting the results of the FOMC meeting. The meeting is critical for the Indian markets since it will show how much tapering the Fed is planning for its third quantitative easing programme (QE),” said Raghu Kumar, Cofounder RKSV, a leading broking firm.

An aggressive tapering (anything above $10 billion dollar per month) could signal a decrease in expected FII fund flows into India, which could deal a set of difficult cards to the RBI when it meets on Friday.

“On one hand, the RBI would want to keep inflation levels under control by keeping rates on hold. On the other, an aggressive tapering by the Fed could force the RBI to intervene and possibly change its predicted course of action by cutting rates in order to stimulate GDP growth. All eyes will be on the FOMC meeting as this will surely produce heavy volatility in both the equity and currency segments,” Mr. Kumar added.

Wait and see

“The Indian rupee along with most asset classes were on a wait-and-see mode with FOMC meeting slated for tonight. We believe there is a strong case for US Fed to start reducing the monetary accommodation in a phased manner as it was originally seen as a contingency plan to counter-act the tail risk in Euro zone and negative effects of feared US Fiscal cliff, said Anindya Banerjee, Currency Analyst, Kotak Securities.

There is growing recognition that QE (quantitative easing) as a tool to promote economic growth is losing its effectiveness and also creating the risk of financial imbalances.

However, along with tapering of liquidity, one must also focus on the tone of the forward guidance on interest rate outlook from the US Fed.

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