The rupee zoomed Rs 1.61 to 61.77 against the dollar and the Sensex rallied 685 points to 20,646.64 on Thursday after the US Federal Reserve surprised world markets by retaining its $85-billion monthly bond buying programme.
The Fed's decision is expected to ease the outflow of dollars from emerging markets, including India, stabilise the rupee and reduce the pressure on the current account deficit (the gap between dollar inflows and outflows). The Fed will review its decision at its next meeting that is expected in December.
Relieved investors pushed the Sensex and the rupee to their highest levels since November 11, 2010 and August 16, 2013, respectively. On the stock markets, Thursday's rally added Rs 1.84 lakh crore to investor wealth.
"It (the Fed decision) came as a huge surprise," said Dipak Dasgupta, principal economic advisor in the finance ministry. "It has the potential to add about 50 basis points (100 basis points make up one percentage point) to our growth in the near term."
"It is business as usual for us," said Arvind Mayaram, economic affairs secretary.
All eyes are now on RBI governor Raghuram Rajan who will present his maiden monetary policy on Friday. The question on everyone's mind is: Will he cut rates?
"The government's objective is to incentivise growth… but ultimately, it is a decision the (RBI) governor will take..," said Mayaram.
India's growth rate had declined to 4.4% in the first quarter of the current financial year and many agencies, including the Prime Minister's Economic Advisory Council, have scaled down their GDP growth projections for 2013-14. The PMEAC has cut its forecast to 5.3% from 6.4% in April.
Reflecting India weakening economic fundamentals, the rupee had crashed 22% against the dollar between May 1 and August 28 when it hit a record low of 68.85 per dollar. It has since recovered some lost ground but is still down about 13% since May 1.
But the twin rallies in the currency and stock markets should not blind investors to the problems in the economy.
"We should watch out for indicators like export growth to continue and for investments to pick up (before we can say that the economy has bottomed out),"said Lalit Thakkar, managing director, institutions, Angel Broking.