The domestic market has welcomed the US Federal Reserve's decision to pause the two-year rate hike spree with great gusto as the Bombay Stock Exchange benchmark, Sensex, soared more than 100 points on Wednesday, a day after the policy announcement.
In fact, the 30-share barometer index had surged more than 200 points on Tuesday as well and the market observers term the expectations for the US interest rates being kept unchanged at 5.25 per cent as the major trigger.
"Indian markets are affected by the interest rate changes in the US as lower interest rates attract funds flow into the emerging economies like ours," Vishal Goyal of investment bank Edelweiss Capital said.
The federal funds rate is the benchmark interest rate at which the banks and financial institutions charge each other on overnight loans, which eventually affects a host of other interest rates charged to consumers and businesses.
In fact, robust inflows from FIIs have been the key drivers for each of past 1,000-point rallies from 7,000 to 12,000-level of the Sensex in the past, the analysts said.
Similarly, the recent sharp fall from the all-time high of 12,671.11 points in May was also triggered by huge FII sell-off on the back of rising interest rates in the US and other markets.
However, the market appears to have regained most of its lost ground and has returned above the 11,000-point level after falling below the 8,800-point level not long ago.
Once again, the upward movement has been triggered to a large extent by resumption of buying by FIIs, who have been net buyers of more than Rs 700 crore so far in August.
Large portion of the FII inflows come in broadly through four categories - India-dedicated funds, allocation to India from emerging market funds, hedge funds and long-term pension funds such as Fidelity. However, the opinion is divided on the issue of the immediate impact of the Fed decision on the Indian markets.
"The US Fed move is a positive indicator for the Indian stock markets, as US is the largest economy in the world and India as well as the rest of the world is impacted by the changes in the US interest rates," Himendra Hazari, research head at brokerage firm Karvy said.
However, the Fed stance that there might be further hikes in the future if the inflation accelerates, is surprising and markets would remain cautious in future, Hazari said.
Vishal Goyal of Edelwiss Capital Ltd said, "The markets have already shown the affect of the US Fed keeping the rates unchanged as they are well in the positive territory." The US Fed has hiked rates 17 consecutive times, pushing the headline US interest rate to 5.25 per cent.
Changes in the federal funds rate affects many economic indicators such as short-term and long-term interest rates, foreign exchange rates, the amount of money and credit, and ultimately a range of economic variables, including jobs and consumer prices.
The next Fed rate-setting meetings this year are scheduled to be held on September 20, October 24 and December 12, and these meeting are again expected to be closely watched events in the Indian stock market arena.
More from rediff