Despite attractive valuations due to short coverings, a barometer index of the Indian equities closed flat on Thursday, even as information technology, consumer durables and healthcare stocks rose.
The markets were dragged down over the uncertainty on the Reserve Bank of India's rate cut decision, depreciation in rupee value and slowing down of world growth.
The barometer 30-scrip sensitive index (S&P Sensex) of the Bombay Stock Exchange (BSE) gained only 39 points or 0.15 percent. The Indian markets are closed on Friday on the account of Eid u'l Zuha.
The Sensex had previously gained 171.15 points or 0.67 percent to 25,822.99 points on Wednesday.
The Indian equity markets opened on a lower note on Thursday, following a sharp downward correction in Japan's Nikkei.
Japan's Nikkei index fell by 2.76 points. Hong Kong's Hang Seng dropped by 0.97 percent. However, China's Shanghai Composite Index inched up by 0.54 percent.
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Notwithstanding the initial downside corrections, the Indian equity markets pared their initial losses due to bargain hunting.
Stock prices became attractive due to "short coverings" as investors unravelled their investment positions on the expiry day of the September derivatives series.
Furthermore, the wider 50-scrip Nifty of the National Stock Exchange (NSE) closed flat. It gained marginally by 22.55 points or 0.29 percent at 7,868.50 points.
The S&P BSE Sensex, which opened at 25,798.05 points, closed at 25,863.50 points, up 40.51 points or 0.16 percent from the previous day's close at 25,822.99 points.
The Sensex touched a high of 25,949.90 points and a low of 25,670.96 points in the intra-day trade.
Market observers pointed out that short coverings made valuations attractive and lifted sentiments and prompted value buying.
"The markets opened lower on the back of sharp correction in Nikkei. However, it rose steadily due to short coverings on the expiry day of September series. Short coverings lifted prices," Anand James, co-head, technical research desk with Geojit BNP Paribas Financial Services, told IANS.
"Rollover by market close was seen near 55, when compared to 65 levels last month, suggesting, that investors are still approaching the rate decision with uncertainty, even though the chances of a rate cut of have gone up," he said.
Other market watchers cited that the markets closed flat, reflecting a continued uncertainty over the possibility of a US Fed's rate hike later in the year.
Gaurav Jain, director with Hem Securities, said: "Indices traded in a narrow range and witnessed a choppy trading session. Volatility ruled throughout the day owing to September series expiry."
"Investors preferred to unwind their positions before the long weekend and awaiting the key US macro data and US Federal Reserve chairman Janet Yellen's speech which will be released later tonight," Jain said.
Recent US data showed that the US manufacturing growth stayed at a two-year low in September. This dragged down the US markets.
The markets are expected to turn bullish in anticipation of a rate cut by the central bank, said a market expert.
"We expect markets to start trading with a positive bias over the next couple of sessions led by the end of September F&O (futures and options) series and expectations of a rate cut in the Reserve Bank of India (RBI) policy later this month," Vaibhav Agrawal, vice president, research, Angel Broking, told IANS.
The RBI will decide on whether or not to ease the key lending rates during its upcoming monetary policy review slated for September 29.
The rupee depreciated by 17 paise on Thursday. It closed at 66.15 to a US dollar from its previous close of 65.98 to a greenback on Wednesday.
Sector-wise, information technology (IT), consumer durables, healthcare, technology, entertainment and media (TECK) and fast moving consumer goods (FMCG) stocks supported the market recovery.
However, capital goods, metal, banking and oil and gas sectors came under intense selling pressure.
The S&P BSE IT index augmented by 227.01 points, consumer durables index gained by 204.22 points, healthcare index increased by 129.81 points, TECK index rose by 97.47 points, and FMCG index was higher by 73.43 points.
The S&P BSE capital goods index receded by 171.36 points, metal index declined by 95.87 points, banking index fell by 89.21 points and oil and gas index was lower by 66.52 points.
Major Sensex gainers during Thursday's trade were: Lupin, up 3.55 percent at Rs.1,989.45; Gail, up 2.51 percent at Rs.294.45; Infosys, up 2.22 percent at Rs.1,141.40; ITC, up 2.09 percent at Rs.322.65; and Bajaj Auto, up 1.91 percent at Rs.2,283.10.
The major Sensex losers were: ONGC, down 3.71 percent at Rs.227.40; Coal India, down 2.79 percent at Rs.318.60; Tata Steel, down 2.58 percent at Rs.215.40; Larsen and Toubro (L&T), down 2.25 percent at Rs.1,462.25; and Tata Motors, down 2.11 percent at Rs.303.65.