Washington/Mumbai Sept 18: The US Federal Reserve on Tuesday slashed the benchmark federal funds rate by half a percentage point in a bold bid to buffer the economy from a housing slump and related financial market turbulence.

The decision by the central bank’s Federal Open Market Committee took the US overnight rate down to 4.75 per cent, its lowest level since May last year.

It was the first cut in the inter-bank rate — the Fed’s main tool to influence the US economy — since June 2003 and the first half-point reduction since November 2002.

Financial markets had widely expected the Fed to lower overnight borrowing costs, but were split over whether the move would be a quarter-point or a more-aggressive half-point.

In a related move, the Fed also lowered the discount rate it charged for direct loans to banks by a half-point to 5.25 per cent.

Indian bourses anticipated the Fed move and bucked the trend in Asian markets and stayed bullish during Tuesday’s trading.

The bellwether sensex surged 165 points to close at 15669.12 — its highest level since July 26 and just 200 points adrift of its record high 15868.85 set on July 24.

Analysts felt that the sensex could set a new record tomorrow following the Fed move.

Banking stocks propelled the surge in the Indian markets with the State Bank of India leaping by Rs 46.85 to Rs 1,693.40 and ICICI Bank gaining by Rs 30.30 to Rs 925.05.

In the rest of Asia, banking stocks drooped amid fears that credit woes in the US would deepen and affect other markets.

A reduction in interest rates is seen as a good sign as it will channel more money into emerging markets such as India.

Dealers said the markets had opened flat but gained confidence towards the noon when the European markets opened in the positive territory.

“Domestic investors are slowly realising that sub-prime problems in the US will not affect India significantly. The Indian markets are vibrant and inflows are strong,” Dhiraj Sachdev, vice-president and fund manager, PMS, HSBC Asset Management, said.