Subject to no fresh negative surprises from the US administration, the market is likely to test its June-end high of 25,669.30 from Friday’s closing of 24,894.25—a 3% rally—by or before the Diwali week, which runs from 18-23 October, the experts said.
They cited a recent short squeeze in the options market where almost ₹5.5 trillion worth of bearish bets were closed out in a matter of days, preceding the latest meeting of the Reserve Bank of India’s monetary policy committee (MPC) that concluded on 1 October.
A short squeeze refers to bears being forced to close out their sell or short positions by buying them back due to a sudden rise in prices. This buying action further boosts share prices.
The Indian markets have been testing positive waters in recent days after a period of consistent decline. The benchmark Nifty 50 rose 0.9% on 1 October after eight straight days of decline that saw it fall more than 3%. The revival came after the MPC proposed to allow banks to finance acquisitions by corporates and enhanced limits for lending against shares and real estate investment trusts or REITs, among a slew of other measures.
Meanwhile, a separate fiscal boost to market sentiment came after the GST Council’s 56th meeting on 4 September simplified the indirect tax to a two-slab structure of 5% and 18% from four slabs earlier, effective 22 September.
While the fiscal tax sop resulted in the Nifty 50 gaining 2.7% to 25,423.6 from the Council’s meeting through 18 September, the benchmark began to slip a day later.
The Nifty 50 recorded a 3.2% dip to 24,611.10 through 30 September, following US President Donald Trump’s proclamation of a one-time $100,000 payment on new H-1B visa petitions, aimed largely at Indian software professionals who account for 70% of such visas.
However, the market recovered from its blues to rally 0.9% to 24,836.3 on Wednesday and built on its gains to settle a fifth of a percent higher at 24,894.25 on Friday, after remaining shut on Thursday due to the Dussehra holiday.
One of the reasons for the recovery was option sellers closing out ₹5.5 trillion worth of excess index and stock call option positions over puts from 26 September to the end of the month. This was followed by bulls selling more put options relative to call options on Wednesday and Friday, a sign they expect markets to rise and, thus, eat up the premium or price paid to them by the put buyers.
As of Friday, the value of marketwide puts exceeded that of marketwide calls by ₹22,119 crore, according to Rohit Srivastava, founder of analytics firm IndiaCharts.
“Normally to see such a huge shift over just two days is rare and indicates more short-covering is likely. The rally could probably stretch to the June high,” Srivastava said.
Sentiment tends to be bearish when more calls are sold relative to puts, and bullish when more puts are outstanding than calls, as is the case currently.
Market veterans like A Balasubramanian, managing director of Aditya Birla Sun Life Mutual Fund, attributed the optimism to a combination of “GST rationalisation” and “dovish monetary policy”, which would spur consumption and credit growth without impacting banks’ net interest margins, or the difference between interest earned on loans and paid on deposits.
These measures could have a positive rub-off on earnings growth. Operating profits for Nifty 50 and Nifty 500 companies (ex-financial services firms) rose 12.8% and 12.5%, respectively, year-on-year in the June quarter— the first double-digit growth in five quarters, thanks to lower input costs and a favourable base, per NSE data.
Balasubramanian expects these figures to improve further from the second half of the current fiscal. Further, he expects the rally to gather speed after Diwali due to a “likely” trade deal between India and the US that could reverse the foreign portfolio investor (FPI) outflows.
“I think we could hit a fresh high by December, when earnings growth picks up, thanks to the fiscal and monetary push,” he said, when asked if the market could test its record high of 26,277.35 hit on 27 September last year. “Improvement in earnings will, in turn drive FPIs to turn bullish on Indian markets again.”
Another old market hand, Nirmal Jain, founder of IIFL group, agreed. “The markets are set to reap the benefits of the GST cut and the monetary policy measures taken by RBI to boost credit growth and spur economic activity,” Jain said. “A likely trade deal with the US in November can add to the mojo and drive markets to a new high.”
While FPIs have sold more than ₹2 trillion in the secondary market in the calendar year through 3 October, domestic institutional investors or DIIs led by mutual funds have net purchased shares worth ₹5.5 trillion, resulting in markets recovering 14.5% from a low of 21,743.65 on 7 April to Friday’s close of 24894.25.
Alongside their sales in the secondary market, FPIs have shorted futures contracts on indices like Nifty and Bank Nifty, due to the global tariff tensions and relatively higher valuations of Indian stocks.
Their long-short ratio on index futures stood at just 6.73 on Friday, indicating they are long less than seven out of every 100 contracts.
However, they were net long 1.29 million stock futures contracts as of Friday, which shows they are adopting a bottom -up approach in the market.
Analysts like IndiaCharts’ Srivastava believe that for any rally to sustain, FPIs will have to close out their short index futures contracts.
