Fed's no-show on tapering lifts Dow, S&P to record highs; Sensex to rally

The Dow Jones stock index in the US hit an all-time high on Wednesday after the Federal Reserve said it would continue buying bonds at an $85 billion monthly pace in a surprise move. Most analysts expected the US central bank to taper its stimulus by $10-15 billion per month.

"The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the US central bank said in a statement announcing its decision.

Fed's decision means the policy of super easy money will continue for a few more months. For emerging economies like India, this is good news. Indian economy is heavily dependent on foreign funds to finance its record current account deficit, which hit a record 4.8 per cent of GDP in the last fiscal.

The Indian rupee, which had sunk to near 69 per dollar last month, is likely to continue its winning streak as the dollar weakened against a basket of currencies post Fed's decision.

Stock markets are also likely to rally sharply on Thursday. Indian markets have recouped most of their losses over the last two weeks tracking gains in the rupee.

Foreign investors have resumed buying Indian equities and that momentum is likely to gather pace. Foreign institutional investors (FIIs) have bought equities totalling more than Rs. 7,200 crore over the previous nine sessions.

The Fed's decision also gives Reserve Bank of India (RBI) Governor Raghuram Rajan much needed leeway to formulate his maiden monetary policy on Friday. A tapering by the US Fed would have forced Dr Rajan's hands to hike key interest rates to defend the rupee by making India attractive for foreigners.

Now, he has got some elbow room to bring the sluggish growth into the equation.

Dr Rajan is expected to leave key policy rates unchanged and continue with the cash tightening measures to stabilise the rupee, and focus on checking runaway inflation, according to a Reuters poll.

On the Wall Street, the Dow Jones industrial average jumped 1 per cent to 15,676, while the S&P 500 rose 1.2 per cent to 1,725 - both were record highs. The Nasdaq Composite rose 38 points, or 1 per cent, to 3,783. Gold prices also rallied.

Fed's move comes against the backdrop of a somewhat gloomier outlook for economic growth from US Fed officials. In a new set of quarterly forecasts, the Fed now sees growth in a 2 per cent to 2.3 per cent range this year, down from 2.3 per cent to 2.6 per cent in its June estimates.

The downgrade for next year was even sharper: 2.9-3.1 per cent from 3.0-3.5 per cent.

Most policymakers, 12 out of 17, also projected the first official interest rate hike will come in 2015. That's despite forecasts for unemployment to potentially reach 6.5 per cent, the threshold at which rate hikes will begin to be considered, sometime next year.

To temper any market jitters from a slowing in its purchases, the Fed reiterated that it will not start to raise rates at least until unemployment falls to 6.5 per cent, so long as inflation does not threaten to go above 2.5 per cent. The US jobless rate in August was 7.3 per cent.

(With inputs from Reuters)