Buying by FIIs even on the last day of the current settlement on the BSE continued for the seventh day in a row, pushing up stock prices. Speculators stepped in to add to the buying frenzy. The Sensex crossed the crucial 3,700-point resistance level in the morning session. It resumed substantially higher at 3,713.44, touched a high of 3,773.85 and close at 3,707.75, showing a gain of 58.89 points against previous close of 3,648.86 points.

Brokers said the initial gains were wiped out on account of hectic selling at heavyweight counters of HLL and ITC. FII buying interest continued in the commodity, banking, hotels, pharmaceuticals, utility,telecommunications and capital goods counters. Local punters are understood to be front running on these counters with a number of such stocks hitting the upper limit of the circuit.

"The market has gone up too much too fast and apart from the FIIs funds flow, there has been a lot of shortcovering at 3,700 points. One should wait and watch before committing more funds into the market," said BSE broker Dilip Bhat.

Says Bobby Surendranath, fund manager at ITC Threadneedle Mutual Fund: "The rally should continue next week and FII inflow will continue. UTI will continue to sell and this will be absorbed by the foreign funds."

The Aditya Vikram Birla Group of companies, which are major commodity players, bounced back on FII purchases. Hindalco hit the upper circuit at Rs 632.85, following an impressive performance by the company. Market players expect the company to perform better owing to improved global aluminium prices. Other group companies like Grasim and Indian Rayon were also firm.

SBI continued tobe firm on FII buying and crossed the Rs 200 mark to touch a high of Rs 212.15 before retreating towards mid-session on profit booking. Hotel stocks like Indian Hotels at Rs 339.35 and East India Hotels at Rs 186.80 hit the upper limit.

A fund manager explained how liquidity in the Indian markets has improved, facilitating a number of new funds to invest in the country. Partly owing to the success of the dematerialisaiton and the saturation in other emerging markets, new funds find Indian paperattractive.

"Most of the FII funds are open-ended and it is very important for them to have improved turnover and liquidity in the market before they invest as this lends to them flexibility to liquidate fast so that they can meet redemptions," said the fund manager.

Giving an example on the improved turnover in the Indian market, he said that BSE and NSE together have a turnover of around Rs 5,000 crore and, compared to this, Korea has a turnover average of Rs 4,000 crore to Rs 5,000 crore, Hong Kong of aroundRs 4,000 crore to Rs 5,000 crore (apart from the fact that the market capitalisation of Hong Kong is 2.5 times that of India), and Taiwan has a turnover of Rs 10,000 crore. These figures show that the Indian markets are liquid enough for new funds to invest.

According to fund managers, FII inflows will continue as one, the asset allocation for the emerging markets has increased and, second, gains from the south-east Asian economies have plateaued to a certain extent with the emerging market fund managers making a lot of money in the last six months.

According to fund managers, the inflow of money will continue, and a pointer to this fact is that the FIIs pumped in over Rs 1,000 crore in April itself, even though this month saw the maximum instability on the political front.

Says the chief executive officer of Sun F&C Mutual Fund, Nikhil Khattau: "Globally, the sentiment has improved and on the domestic front both retail and corporate clients are showing positive inclinations and the funds flow into themarket should continue. Around Rs 1,000 crore made its way into the market in the month of utmost instability. Post elections, markets should improve further."

Surendranath does not rule out the Sensex touching the 4,000-point mark. "Compared to other stocks in Asia, the prices of petrochemicals, banking and commodity stocks are much cheaper in India and going by the tug-of-war between the growth and cyclical stocks, the price levels at which these stocks are available offer really good value. Thus, we will see continued inflows into the regional markets," he said.

According to K R Bharat, managing director, Credit Suisse First Boston, allocations to the Asian region have improved and there are improved signs of an upturn in the economy. ``The mood in the market is positive and the bargain hunters are coming in to make the most of the increased allocations. With signs of recovery already visible globally the FIIs money will continue on flow into the emerging markets and through them into India".

GDRsrise faster, scale 52-week high
Prices of GDRs have been rising at a faster rate than those in the domestic market. Thanks to aggressive buying by FIIs, the Skindia GDR Index has been driven to its 52-week high. During the week the GDR Index jumped by a whopping 28.81 per cent to 800.7 points.

Due to the increased activity on the bourses, the average spread of the 39 most actively traded GDRs has narrowed to 8.63 per cent on May 6 from 9.54 per cent on April 29. The average premium has also moved down from 14.38 per cent to 13.36 per cent.

GDRs from the telecom sector appreciated by 37.49 per cent followed by hotel and auto sector gaining 21.62 per cent and 20.17 per cent, respectively. The top GDR gainers were Indian Hotels (46.34 per cent), VSNL (46.21 per cent and L&T (45.98 per cent).

With aluminium prices looking up on the LME, the GDRs in this sector spurted. Hindalco's GDR has apppreciated by 44.06 per cent since April, while Indal has moved up by 17.86 per cent.