Stock indices gained over 1.8% after US Fed Wednesday said it would not immediately hike rates once it stops infusing liquidity through its bond-buying programme in October.
The decision to keep rates unchanged triggered rally in the domestic market, as worried investors in the past few sessions had resorted to profit taking amid concerns of a rate hike.
Mirroring the relatively positive Asian markets sentiment, the BSE Sensex re-captured the 27000-mark to end 486.92 points or 1.81% higher at 27112.21 on Thursday, while the broader S&P CNX Nifty ended at 8114.75, up 139.25 points or 1.75% higher.
The markets opened weak but started recovering later in the day. Dealers said the gains in the market were largely on account of short-covering and entry of long-ended fund buying like pension funds.
China's commitment to invest $20 billion in India over the next five years also aided the sentiment and led to a fresh round of rumours that India could get re-rated upwards by global rating agencies.
However, the euphoria appears to be short-lived as foreign institutional investors did not participate in the upsurge and were instead marginal sellers of equities.
According to the provisional data released by the exchange, FIIs were net sellers of equities on Thursday to the tune of Rs 9.57 crore, while domestic institutional investors bought Rs 84.45 crore worth of equities.
"The markets can now expect a weekend correction tomorrow (Friday) as the rally is unlikely to sustain without buying support from FIIs," said Arun Kejriwal of Kejriwal Research.
Thursday's run appears largely on account of diminishing fears amongst emerging markets that liquidity could dry up once US Fed bond-buying comes to an end in October. However, given the fact that Fed has decided not to hike interest rate, the money flow to emerging markets would remain unaffected, said dealers.
"The comfort provided by Fed in terms of a delay in potential US interest rate hike improved market sentiment," said UR Bhat, managing director at Dalton Capital Advisors.
Market participants said the markets have been on the decline since September 8, when it hit an all-time peak of 8180, largely on fears that dollar could strengthen against major currencies once US hikes rates. This in turn would make US bonds attractive and restrict money flows to emerging economies, said a treasury head at a foreign bank.
"The latest decision by Fed has brought about some reprieve to the sagging sentiments," he added.
With China and Japan having firm commitments on their investments in India, market players are still bullish on the markets.
"Structurally the bull run remains intact and under valued stocks in mid-caps should continue to pull the markets up," said G Chokalingam of Equinomics Research &Advisory.
According to Rahul Shah, vice president at Motilal Oswal, Nifty has pierced the crucial 8080 level and the next level it could go is 8250.
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