Nifty’s relief rally could extend to 22,900 in the short term. But it may not last long.

On Thursday, stock market bulls kept India’s benchmark indexes up for a second straight day following 10 straight sessions of battering. Foreign portfolio investors (FPIs) closed some of their short index futures positions the past two sessions, driving up the market.

While the Nifty 50 gained 0.93% to end Thursday at 22,544.70 points, options data show the index could move in a range of 22,233-22,867 over the next few days, with a bias to the top end of the range.

“It’s better to wait and watch, adopt a bottom-up stock-specific approach, and deploy funds gradually as making money this year won’t be that easy,” said R. Venkataraman, chairman of broking firm IIFL Securities.

An analysis of NSE data showed that individual investor ownership of domestic stocks, directly and through mutual funds, in the December quarter surpassed that of FPIs for the first time in 18 years—18.2% to FPIs’ 17.4% share in the financial third quarter.

In other words, FPIs still hold materially significant short positions on index futures—Nifty and Bank Nifty—and remain net sellers in the cash segment, which is what’s worrying analysts like Venkataraman.

While FPIs have net sold shares worth ₹1.46 trillion in the secondary market this calendar year through 5 March, they held net short positions of 174,355 contracts in Nifty and Bank Nifty as of Thursday, per the National Securities Depository Ltd, or NSDL.

This translates to a long-short ratio of almost 18.5%, which is way below the ratio of 70-80% pre-September.

‘A mere bounce’

The recent market rally has seen the Nifty holding on to the 21,900-22,000 support level, after falling from a record high of 26,277.35 on 27 September to a low of 21,964.6 on 4 March, a decline of 16.4%.

“Unless the FPI bias on the cash and the derivatives markets turns positive, this up move is a mere bounce within a larger corrective phase,” said Sahaj Agrawal, senior vice president and head of derivatives research, at Kotak Securities.

Agrawal said the bounce could extend to 22,900 from Thursday’s 22,544.70. 

If that level is decisively broken, the market could see the rally extend through 23,500, thanks to buying by retail investors and reversal of FPIs’ bearish cash and derivatives bias, Agrawal said. He warned, however, that global news flows on US tariffs could dictate the market moves beyond the very short term.

“Rallies within larger downtrends could be sharp and extend for a week or 10 days through two months,” Agrawal said.

FPIs began selling Indian stocks in October amid tepid corporate earnings and rising bond yields in the US, which were induced by inflation concerns as a result of a potential tariff war under a new administration if Donald Trump won the US presidential election. He did, and has unleashed a global tariff war.

The generic 10-year US bond yield rose from 3.62% in mid-September through a closing high of 4.79% on 14 January. It has currently declined to 4.29%. 

The dollar index rose from a low of 100.38 on 27 September to a closing high of 109.95 on 13 January. It currently hovers at around 104, offering some reprieve to emerging markets like India.

According to Rohit Srivastava, founder, IndiaCharts, the current optimism in India’s stock markets was underscored by domestic institutional investors, including mutual funds and insurance companies, holding a record net long position of 56,274 contracts on index futures as of Thursday.