FIIs may take indices to new highs

Market Watch

The US Fed rate cut has changed the equity market sentiment dramatically. Foreign institutional investors (FIIs), who were selling in a big way in August, have suddenly become major buyers. Their buying may continue for some more days and both the benchmark indices are likely to see new highs.

FIIs bought shares worth Rs 4,837 crore in the last three days after the Fed announced the rate cut. In September so far, their net buying on the secondary market was worth Rs 8,440.74 crore. The September figure is higher than their net purchases in July, which were at their peak. It is interesting to note that they sold shares worth Rs 12,338 crore in August.

The trend in the last three months suggests how volatile their investments have been. They are set to be active in the next few days and can lift the market up. However, volatility may still continue to haunt the market as the F&O expiry nears. The F&O expiry would be interesting as there are very few short positions this time.

Rising prices of crude oil and metals will also drive the market up. The RBI may or may not cut the rates, but a soft interest rate scenario seems more likely in the near future.

"We are bullish on gilt funds since general rates are falling and bond yields are going up. On the equity side, we are focusing more on large-cap stocks as the gap between mid- and large-cap stocks is widening, with the former rising faster," said Nilesh Shah, chief investment officer, ICICI Prudential Mutual Fund.

In recent months, domestic institutional investors have taken positions inverse to those of FIIs. In September, domestic institutions, as opposed to FIIs, were net sellers, offloading shares worth Rs 2,463.8 crore.

"Foreign liquidity is driving the market in anticipation of a rate cut by the RBI in response to the Fed's decision to cut interest rates," said a research head with a local brokerage house. According to him, technically the Nifty resistance is at 4,920. If this level is breached, the next level would be 5,020.

Expectations of better corporate earnings can also be a trigger for the coming weeks. The market momentum is strong, with the number of shares traded hitting a new record. The NSE on Friday recorded 53,01,123 trades and a historical high of 10,146 lakh shares were traded.

The Nifty futures are trading at a premium. The spot Nifty is at 4,837.55, while its futures closed at 4,852.60. The Sensex gained 960 points or 6.16 per cent last week and the monthly gain was 18.4 per cent or 2,575 points. Compared to September 21, 2006, it is up 35 per cent. Half of the annual gain came in the last one month.