The Bombay Stock Exchange (right) is seen behind the Bombay High Court building in Mumbai. The Sensex climbed 1% at 26,218.91 points yesterday, extending the week’s gain to 2.4%, the steepest since the period ended July 19.

Bloomberg/Mumbai

India’s benchmark stock index climbed to a three-week high, led by lenders and industrials, after the Federal Reserve left interest rates near zero.
State Bank of India, Axis Bank and ICICI Bank were among the best performers on the S&P BSE Sensex, notching up advances of between 2% to about 5%. Mahindra & Mahindra, the largest tractor producer, climbed to a three- week high. Reliance Industries, owner of the world’s largest refining complex, gained for a fourth day, while Oil & Natural Gas Corp climbed to a three-week high. A gauge of property developers rallied 3.2%, the most among 13 sector indexes compiled by the BSE.
The Sensex climbed 1% to 26,218.91 yesterday, extending the week’s gain to 2.4%, the steepest since the period ended July 19. The Fed’s decision to keep US rates unchanged may pave the way for the Reserve Bank of India to reduce borrowing costs for a fourth time this year, according to ICICI Prudential Asset Management Co India’s two key inflation gauges showed continued easing, according to reports this past week, creating room for Governor Raghuram Rajan to cut borrowing costs at the next policy review on September 29.
“The Fed’s decision is positive for interest rates in India, which we are expecting to come down,” said S. Naren, chief investment officer at ICICI Prudential Asset, the nation’s second-biggest money manager with $24bn. “Indian equities continue to be attractive long-term investments.”
The RBI will maintain its own path after the Fed’s decision, Rajan told reporters at a conference in Mumbai on Friday. He reiterated the policy guidance he gave last month, saying he’s watching the Fed move, the monsoon and other factors for room for further accommodation.
Consumer price inflation slowed to 3.66% in August from a revised 3.69% – below the RBI’s target of 6% by January for a 12th straight month. Wholesale prices fell 4.95% last month from a year earlier.
“We continue to see CPI inflation undershooting the RBI’s 6% objective by about 50 basis points in January 2016,” Kotak Securities said in a report. “This, in conjunction with a dovish Fed, should pave the way for a 25 basis point repo-rate cut at the upcoming RBI meeting.”
Lower borrowing costs alone may not help revive the investment cycle as the risks of a slowdown in global economic expansion increase, according to Dimensions Consulting. India’s exports have declined for nine straight months through August, boosting the trade shortfall, official data showed this past week.
“Our local demand is in disarray, exports are falling, and that is bound to impact the economy,” Ajay Srivastava, managing director of Dimensions, said in an interview with Bloomberg TV India Friday. “The Fed’s decision shows it is nervous about the global economy. That’s why we shouldn’t read too much into today’s rally. Our fundamentals are weak.”
State Bank climbed 2.2% to its highest since August 31, while Axis Bank jumped 4.7%, the best performer on the Sensex. ICICI Bank added 1.8%.
Hero MotoCorp increased 2.5% and Mahindra & Mahindra climbed 2.7% to its highest price since August 31. Property developer DLF gained 2.2% and Mahindra Lifespace Developers  jumped 20%, the most since March 2009. The S&P BSE India Realty Index gained 3.2%.
Overseas investors bought a net $470mn of Indian stocks on September 15, the biggest one-day inflow since August 24. That took this year’s purchases to $4bn. They sold a net $2.6bn in August, the worst outflow since October 2008.
The Sensex has slid 4.7% this year and trades at 14.9 times projected 12-month earnings, versus the MSCI Emerging Markets Index’s multiple of 11.
Meanwhile the rupee climbed the most since September 2013 on speculation demand for the nation’s assets will pick up after the Federal Reserve refrained from raising interest rates.
Ten-year sovereign bonds completed their biggest advance since August 25 as economists at DBS Bank and Kotak Securities said the Fed’s decision paves way for the Reserve Bank of India to cut borrowing costs for a fourth time this year. An emerging-market selloff sparked by last month’s shock devaluation of the Chinese yuan and bets the US central bank would tighten policy at its meeting saw global funds dump a net $3bn of Indian shares since end-July, data compiled by Bloomberg show.
The rupee climbed 1.2% to 65.6750 a dollar in Mumbai yesterday, the strongest level since August 20, according to prices from local banks compiled by Bloomberg. Yesterday’s rally took the currency’s weekly advance to 1.3%, the most since January.
“The Fed outcome has provided risk-on sentiment for local equities and the rupee,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank. “It clearly shows that the Fed is also watching other markets before taking a decision on its policy.”
The S&P BSE Sensex climbed to a three-week high yesterday.
Officials are watching developments in China and emerging markets, Fed Chair Janet Yellen said Thursday as she heeded calls from the World Bank and International Monetary Fund to avoid destabilising global markets with the first US rate increase in almost a decade.