The markets are back to their winning ways, a day after a crucial Securities & Exchange Board of India (Sebi) conference call with leading foreign institutional investors (FIIs) cleared the air over the contentious participatory notes (PNs) and the regulator announced a slew of initiatives to speed up FII registration.

The announcements by Sebi chairman Meleveetil Damodaran resulted in the benchmark 30-share Sensex of the BSE climbing 878.85 points, or 4.99%, on Tuesday?its highest single-day gain ever?to close at 18,492.84 points. The positive turn in sentiment was also aided by ample short covering, which sent stock prices spiralling upward through the trading session.

Mirroring the sentiment, the broader S&P CNX Nifty of the NSE ended the day at 5,473.70 points, gaining 289.70 points or 5.59%. The Nifty October futures series ended at 5,483.10 points, commanding a premium of 9.4 points to spot Nifty, ahead of the expiry of the October futures series.

The massive spurt in stock prices was also accompanied by a sharp rise in turnover, which clocked a staggering Rs 1.22 lakh crore, taking the cash and derivatives markets together. Importantly, another closed-door meeting of key FIIs and foreign broking firms with the Sebi chairman took place on Tuesday. The market speculated that this meeting would also see favourable discussions.

The spurt in stock prices saw the rupee record a sharp turnaround and appreciate aggressively on Tuesday. The currency moved in tandem with the bullish stock market indices. This was chiefly because foreign inflows resumed their entry into Indian bourses.

According to provisional figures released by the stock exchanges, FIIs, who were net sellers in excess of Rs 1,000 crore for the past few sessions, turned net buyers worth Rs 391 crore on Tuesday.

Foreign exchange dealers even on Monday expected the rupee to drop to 40 a dollar as they thought Sebi and RBI were keen on reducing capital inflows through derivatives products like PNs. This, in effect, meant that the demand for the rupee would surge as panic outflows by FIIs would lead to a dollar-buying spree.

However, Sebi?s meeting with FIIs on Monday once again renewed stock market optimism that foreign capital inflows would not be hit and the rupee would continue to appreciate. The market now expects the pace of FII money pouring into the country to increase rapidly.

The fear of an oversupply of dollars in the system aided the sentiment of a stronger rupee on Tuesday. The currency, which opened at 39.78 to the dollar against the previous day?s close of 39.90, ended the day at 39.59. There was no intervention by RBI on Tuesday. Forex dealers now expect the rupee to touch 39 to a dollar within weeks.

?I am bullish on the rupee as well as equities,? said the chief dealer at a foreign bank. Six months and one-year dollar forward premia too rose between 20 and 34 bps. Six-month dollar closed at 0.94% over the spot from its previous level of 0.6 bps, while one-year dollar ended 20 bps higher from Monday?s level at 0.87%.

A dealer with a domestic brokerage firm said, ?It seems that with Sebi showing a keen desire to speed up regulatory clearances of foreigners keen to invest in the Indian market transparently, the intensity of the initial crisis on the PNs issue has receded. This resulted in across-the-board buying by FIIs and domestic investors and also prompted them to square off their short positions in the derivatives segment.?

The investment guru of emerging markets, Mark Mobius, who was in Mumbai on Tuesday, also gave the Indian market the thumbs up. Speaking on ?The Global Outlook?How Do We View India?? at the 3rd Annual Indian Securities Forum 2007, Mobius, MD, Templeton Asset Management, welcomed Sebi moves and suggested that India should scrap the $88-billion offshore derivatives instruments used for investing in stocks and improve direct access to markets for overseas investors.

He, however, said, ?The new rules proposed by the Indian regulator to curb the issuance of derivatives won?t stop record inflows into Asia?s third-largest economy, India. The flow will continue, depending on how liberal the new registration is.?

The broader market breadth was strong, with 2,089 stocks advancing higher, compared to 658 stocks that declined on the BSE. Among the Sensex pack, 25 stocks advanced, while five stocks declined.

All the BSE sectoral indices ended the day on a positive note with BSE Capital Goods index remaining the biggest gainer, up 1,208.42 points or 7.76% at 16,777.18 points.