The government's decision late on Thursday to raise diesel prices by 14 per cent, the first such move in 15 months, has raised hopes that reforms might be coming back on tracks. Investors have been concerned over the rising subsidy bill as state-run oil refiners have been selling fuel at below market prices leading to higher fiscal deficit.
The fuel price hike will help avert a sovereign credit downgrade, the prime minister's chief economic advisor, C. Rangarajan, said. "The government has shown it can take hard decisions, very difficult decisions."
The fuel price hike will add to inflation in the short term, but it will ultimately make it easier for the RBI to loosen monetary policy and help revive investor confidence damaged by policy paralysis.
Any rate cuts could help boost foreign inflows into stocks and further shore up confidence in the Indian economy at a time when the dollar is under pressure after the Fed's liquidity measures.
The Indian rupee rose to its strongest level in two-and-a-half months. A stronger rupee means cheaper import especially of crude, which is likely to rise because of monetary easing in the US.
After raising subsidized diesel prices despite heavy political opposition, the government may go further in reviving its stalled reform agenda on Friday when it weighs allowing foreign direct investment in its battered airlines.
The Nifty is nearing the crucial resistance of 5,630 beyond which markets may see a strong upside.
The US Federal Reserve announced a third round of quantitative easing. The Fed said it would buy $40 billion of mortgage securities a month until the US economy improves. Fed's decision would lead to a rise in liquidity in the global economy giving a push to riskier assets like equities and commodities.
Global markets rally: Wall Street rallied on Fed's decision, and the enthusiasm spilled over into Asia. The Dow Jones industrial average cleared 13,500 for the first time since the beginning of the Great Recession.
The Fed's latest actions came a week after the European Central Bank announced its most ambitious plan yet to ease Europe's financial crisis by buying unlimited amounts of government bonds to help countries manage their debts. Analysts said economy-bolstering moves by authorities in the U.S., Europe and China bode well for markets at least in the short-term.
(With inputs from Thomson Reuters)