Street has a spring in the step, but no bottom yet

The Nifty and Sensex have recovered over 1,200 and 3,700 points from their nine-month lows seen earlier this month. On Thursday -- the day of weekly derivatives expiry which tends to see sharp movements -- the Nifty rose 1.24% to close at 23190.65, while the Sensex settled 1.19% higher at 76348.06.

The continued recovery has been aided primarily by FPI short-covering in Nifty and Bank Nifty futures and, to a lesser extent, by domestic institutional investors (DIIs) buying in the cash market amid stability in the rupee and underperformance of the US markets.

"Market direction will be determined by flows," said Nilesh Shah, managing director at Kotak Mahindra AMC. "While the FPI selling intensity has reduced, they are still offloading Indian shares. To be certain that markets have bottomed, FPI outflows have to reverse, because MFs will not give them exits at current prices."

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While the Nifty has risen 5.6% from its nine-month low of 21964.6 on 4 March, the S&P 500 has declined 2% from 4 March to 5674.29 through Wednesday, on fears of higher US inflation on the back of a tariff war. The US Fed kept rates unchanged at 4.25-4.5% at its policy meeting on Wednesday, in line with market forecasts because of an expected rise in household prices.

The rupee has gained 1% to the dollar at 86.37 since 4 March, but FPIs have net sold ₹36,675.15 crore of cash market shares in the month through 19 March. While DIIs led by mutual funds have matched them with net purchases of ₹37126.47 crore, it's mainly short-covering by FPIs that has enabled the market to rally from its nine-month low hit earlier this month.

Between 4 March and Thursday, FPIs' open or outstanding futures index futures positions fell from 187,423 contracts to 111,070. For closing out a short position, the investor has to buy it back, which pushes up prices.

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The Nifty fell 16% from a record high of 26277.35 on 27 September to a low of 21964.6 on 4 March on FPI selling of cash market shares worth ₹1.99 trillion between October and February. During the period, DIIs, including mutual funds, banks and insurance companies, net purchased shares worth ₹3.4 trillion. While this kept the markets from falling off a cliff, the exit to FPIs given by DIIs at lower levels caused a calibrated decline of 16% in Nifty and Sensex.

The bounce

The Nifty secured support at 21964.6, barely above the low of 21884.5 hit on 4 June last year following the national elections, when the BJP failed to win an absolute majority. However, from there, the market rallied a staggering 20% to a record 26277.35 on 27 September, betting on political continuity through a coalition.

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The anticipation of a Trump win, given his promise to cut corporate taxes and raise tariffs to curb the burgeoning debt, spurred a rally in the S&P and ten-year US bond. This sparked an outflow of FPI money from emerging markets like India, which suffered a double whammy of slowing capex by the government and tepid corporate results, owing to a slowdown in household consumption.

This caused the Indian markets to wipe out almost all post-election gains, with a 16% decline to a low of 21964.6 on 4 March. But from oversold positions, they have rebounded on FPI short-covering of derivatives. Meanwhile, the US markets have tanked -- S&P 500 has fallen from a record closing high of 6144.15 on 19 February to 5674.29on Wednesday.

Gaurav Dua, head of capital market strategy at Mirae Asset Sharekhan, expects the rebound to extend to 23,500 before further cues like reciprocal tariffs, quarterly earings and the RBI monetary policy emerge to determine the course of FPI flows.

The key technical resistance is at 23600, which is one of the important retracements of the fall from 26277.35 to 21964.6. If this resistance is decisively breached, the rally could extend to 24120.

Rohit Srivastava, founder, IndiaCharts, however, believes the market has bottomed -- FPI short-covering and DIIs' bullish positions in index futures give him the confidence that a bottom is made. He expects the market to rally to 24630.

Nifty monthly expiry options indicate a range of 22930-23470 for the markets in the very short term.

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NSE's cash trading volumes on Thursday stood at ₹1.04 trillion, the second session of over ₹1 trillion volumes, against the 13-day average volume of ₹88,511 crore. A market analyst attributed the rise in volumes partly to pre-positioning ahead of Friday's semi-annual review by global index provider FTSE Russell. FPIs net purchased a provisional ₹3239 crore worth of shares on Thursday, while DIIs sold a net ₹3,136 crore. Net inflows of $1.4 billion are expected into stocks like ICICI Bank, Kotak Mahindra Bank and BSE due to the review.

Rising volumes also indicate rising investor confidence, but Dua said they would have to sustain in order to ascertain that the market recovery was durable.