The Indian stock markets' key indices surged by more than three percent, with the benchmark Sensex touching the highest level in three years, and the rupee zoomed to one-month high after the US Federal Reserve decided to continue with its $85 billion monthly bond-buying programme.
The 30-scrip S&P Sensex of the Bombay Stock Exchange (BSE) closed 684.48 points or 3.43 percent higher to 20,646.64 points, the highest level since Nov 11, 2010.
The US Federal Reserve Wednesday surprised the markets by deciding to refrain from reducing the pace of bond-buying programme. The speculation over reduction had led to a huge sell-off in Indian as well as other emerging markets and their currencies were battered.
The Indian rupee that tanked to a record low of 68.85 against a dollar Aug 28, soared to 61.70 level, the highest in over a month. The rupee also strengthened by nearly three percent.
The wider 50-scrip S&P CNX Nifty of the National Stock Exchange (NSE) gained 3.66 percent or 216.10 points to close at 6,115.55 points, the best closing level since May 2013.
The foreign funds bought aggressively in the Indian equities after the Federal Reserve's surprise move. The Fed said it will keep its bond-buying programme known as Quantitative Easing (QE), intact.
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Market watchers were expecting that the Fed would cut the monthly stimulus of $85 billion by $10-20 billion.
Analysts said the Fed move has given the much needed respite to the Indian currency as well as the stock markets.
"The US Fed's decision on delaying tapering of QE3 would clearly provide respite to the rupee. We believe that now the RBI (Reserve Bank of India) has more headroom to focus on growth supportive measures," said Bhupali Gursale, economist at Angel Broking.
She said the RBI should now act to bring more stability in the currency markets.
"We believe that there is a higher probability now for the RBI to calibrate and ease its liquidity tightening measures that were taken in order to contain Forex volatility," Gursale said.
"At the same time maintaining inflationary expectations also remains a priority."
The Reserve Bank of India is widely expected to keep key policy rates on hold in the mid-quarter review of the monetary policy Friday.
Healthy buying was observed in bank, capital goods, metal, automobile and oil and gas stocks. However, information technology (IT) stocks declined in the day's trade.
The S&P BSE bank index gained 809.27 points, capital goods index closed the day's trade up by 374.44 points, metal index was up 305.21 points, automobile index was up 303.15 points and the oil and gas index was 246.17 points higher.
However, the IT index was lower by 32.90 points.
Suman Jyoti Khaitan, president, PHD Chamber of Commerce and Industry, said the Indian currency and the market would gain further as growth in the advanced economies remained sluggish.
"We believe that advanced economies are still in the sluggish growth trajectory and recent up tick in the growth numbers is only on the basis of various stimulus packages," Khaitan said.
"We expect markets to rebound and rupee to appreciate and consolidate at around 60 per dollar going forward," he added.