Relief rally not to hold for long unless Nifty crosses 4,850 level, say expertsDevangi Gandhi

After falling to the year?s low of 4,544, on Tuesday, the Nifty has rebounded smartly to post a 4% gain, ending the week at 4,714. Traders, however, feel the relief rally could turn out to be temporary and since foreign institutional investors (FIIs) will be away for the Christmas holidays next week, they believe the Nifty would hover in a range of 4,800-4,600.

Meanwhile, fundamental worries continue to weigh on the equity markets. On Friday, brokerage CLSA has cut its forecast for India?s GDP growth for 2011-2012 to 6.7% from its earlier projection of 7.3%. For the quarter ending September 2011, India?s grew at 6.9% compared to 7.7% last year.

The Sensex settled at 15,738.70 points, down 74.66 points on Friday .The index had gained more than 600 points in the past two days, but only after a huge fall of over 800 points in the five consecutive trading sessions. The Nifty also fell by 19.85 points to close at 4,714 points on Friday. The Indian equity market remains one of the worst performing market this year having lost 23% in rupee terms so far and as much as 35% in dollar terms . The MSCI Emerging market index, on the other hand, has lost 20% during the year. FIIs have sold Indian equities worth $554 million this year whereas they had shopped for more than $29 billion worth of stocks last year. A weak rupee has added to their woes. Since August the rupee has declined by 20% from R44 against the dollar to R52.90 adding to concerns of higher inflation, especially since crude oil prices remain above $100 a barrel.

According to Shetty, the bounce-back in the Nifty could continue in the coming week taking it towards the 4,800-4,850 range. ?This,however, does not change the overall bearish stance of the market which won?t happen unless the important resistance near 5,000 is crossed,? he said.

Developments in the open interest of the December series highlights this view. While the December 5,100 strike, on the call side, held the maximum open interest, on Friday, open interest of both 4,800 and 4,900 calls witnessed a 10-15% gain.

Even if the Nifty ends near 4,850-mark in December, about 135 points higher than its Friday?s close, the index would have hardly made any gain for the month. The Nifty closed at 4,832 in November end. Such a development would contrast with the historical performance of the market since 2007 wherein the benchmark indices always rallied during the month of December. Since 2007, the Nifty has posted 3 to 7% of gains during the last month of every year.

The government’s inaction on reforms and pressure on corporate earnings have dampened the mood in the market. Concerns on the high fiscal deficit remain but a possible cooling down of inflation followed by rate cuts by the REI could support investments next year.