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The direction of foreign institutional inflows and the rupee against the dollar would be key to deciding the stock market trend in the truncated trading week ahead. With the US Federal Reserve finally announcing the start of a stimulus rollback last week, investors will watch if inflows from foreign investors would be slower and the rupee maintain its strength against the dollar.
Volatility may heighten ahead of the December series futures and options expiry on Thursday. Financial markets will be shut on Wednesday, on account of Christmas.
Investors have taken comfort from the fact that foreign institutional investors (FIIs) have continued to pump money into shares here after the Fed’s stimulus tapering announcement on Wednesday night.
FIIs on Friday net-bought shares worth Rs 990 crore on Friday, according to provisional data, after pouring about Rs 2,200 crore the previous day. However, analysts warn this inflow flood might not last for long.
“Now on, foreign liquidity will not be easy to come by. Though FIIs have bought even after the announcement, this may not continue at the same pace because some developed markets such as Japan are looking more attractive,” said Siddarth Bhamre, head-derivatives, Angel Broking.
Some in the market think FII inflows will not slow down unless the rupee slides, which optimists feel is unlikely immediately. But top broking firms such as Bank of America-Merrill Lynch are betting on the strengthening of the dollar against currencies and emerging markets, including India, underperforming in 2014.
For India, there would be some relief with the current account deficit (CAD) narrowing and investors mounting bets on the outcome of the general elections in April 2014. “We think investors are willing to look through some of the short-term issues (Fed taper), given a large improvement in the trade balance and the potential for a brighter post-election outlook,” said Goldman Sachs’ analysts led by Christopher Eoyang, in a client note.
Last week, the benchmark indices rose 1.7 per cent, with the Nifty closing at 6,274. Analysts said the possibility of the Nifty crossing 6,400 looks remote because FIIs were unwinding their bullish bets in Nifty futures before this level. Angel’s Bhamre expects the Nifty to move in the 6,100-6,400 range in the near future.
“Many of the stronger hands are trading on Nifty in this range,” said Bhamre.
NSE’s Volatility Index (VIX), a sentiment indicator that measures traders’ perception of near-term market risks based on Nifty options prices, fell 16 per cent on Friday, its lowest closing since May. This shows traders see fewer risks in the market.
Shares of software exporters such as Infosys and Wipro could extend gains, as investors are enthused about their prospects with the Fed painting a stronger outlook for the US.
