Both indices have gained nearly 5% since Tuesday when the Reserve Bank of India (RBI) signalled an end to monetary tightening although it upped the key policy rate by 25 basis points, taking it to 8.25%. Fridays was the highest one-day gain for the Sensex since August 29, 2011, when it added 567 points.
On Thursday, the S&P 500 index jumped 3.4% , the 30-scrip Dow nearly 3% and key European indices 3-6%. The S&P is now up 17% from the 13-month low it touched at the start of October. At Thursdays summit of European leaders, the 13th such meet since Europes sovereign debt crisis erupted 21 months back, policymakers also mulled the recapitalisation of European banks and also promised to look urgently at ways to guarantee bank debts even as they agreed to expand a bailout fund to tackle the regions debt crisis. French president Nicolas Sarkozy said the accord will allow Greece to save itself while German chancellor Angela Merkel described the agreement as a good joint package to take the next steps.
The US market's gains on Thursday were also driven by positive GDP data. On Friday, US markets opened flat while all key European indices, the German Dax, UKs FTSE and the French CAC-40 were trading in the green; these indices are now as much as 15-25% above their September lows.
The Indian markets had to catch up for two days since the global markets showed huge moves on Thursday. The reaction today was mainly due to the consensus that the European policy makers were able to arrive at on the Greece rescue package. The market volatility hereon will depend on the implementation of this plan, said Andrew Holland, CEO (investment advisory), Ambit Capital.
Despite the rebound, India is still among the worst performers in emerging markets, with its markets yielding 13% in rupee terms in 2011 but a far bigger 20% in dollar terms, thanks to the 9% depreciation of the rupee against the greenback. The rupee has since bounced back in the last two sessions.
Following the strong rebound, volatility fell to a three-month low. India VIX, the markets gauge of volatility, lost 8% to close at 20.89, the lowest since August 4. Although they were buyers on Friday, FIIs inflows 2011 so far remain negative, while domestic institutions have picked up R22,322 crore worth of shares.