As most Asian markets fell ahead of the US Federal Reserve meeting, Indian shares advanced, tracking firm European markets, indicating expectations of an aggressive rate cut in the world's largest economy stalked by fears of a probable recession.
While most Asian markets were awash in red on Tuesday, the benchmark Sensex of the Bombay Stock Exchange gained 164.69 points or 1.06 per cent to close at 15, 669.12 points. The 50-share Nifty of the National Stock Exchange ended the day at 4,546.20 points, up by 1.15 per cent.
"There was a lot of short covering in Indian markets ahead of the Fed meeting and that has helped the indices close higher today. Markets across the globe will react in different ways to the Fed policy. In case of a 25 basis point rate cut, there may be an immediate correction of 1 or 2 per cent in domestic equities. However, if the Fed cuts rates by 50 basis points, the indices could better their previous highs," said Deepak Jasani, head of retail research of HDFC Securities.
After the high default rate in the sub-prime mortgage market in the US that created fears of a liquidity crunch in the wider economy, pressure mounted on the Fed to act after US employment data in August showed the highest fall in four years.
While more than a third of 90 analysts polled by Reuters last week expected a 50 basis points cut in rates by the Fed, domestic equity markets have only factored in a 25 bps cut, say market experts. If the Fed cuts the benchmark rate for overnight lending in the US markets by 50 bps to 4.75 per cent, Indian shares could march upward, an analyst said.