Moderate Recovery in Nifty Driven by Short Covering; Cautious Outlook Ahead

The biggest question for the market right now is whether a short-term bottom has been made or if further declines are possible. We have already witnessed the largest Foreign Institutional Investor (FII) selling to date, with Domestic Institutional Investors (DIIs) filling some of the gaps, leading to an uncertain scenario. Foreign portfolio investors have sold more than ₹1 lakh crore of Indian equities, while DIIs have invested around ₹97,000 crore.

The potential portfolio shift toward the Chinese market, driven by lower valuations and an expensive Indian market, coupled with subdued corporate earnings, inflation above the RBI limit, sustained peak interest rates, SEBI curbs on derivatives, and an increase in capital gains tax, has all contributed to a corrective phase in the Indian equity market. Looking ahead, the upcoming US elections and the festive mood surrounding Diwali may deter some sellers from the market. Additionally, possible Systematic Investment Plan (SIP) inflows at the beginning of the month should help limit any selling momentum in the Indian market.

Today, the Indian headline Nifty Index made a notable recovery, reaching an intraday high of 24,492 from an intraday low of 24,134, ultimately settling up 158 points, or 0.65%. In the sector indices, almost all sectors ended in the green, with significant advances seen in PSU Banks. Bank of Baroda, Union Bank, Central Bank, and Bank of India all gained around 4%, while Indian Bank and Canara Bank experienced sharper increases of 10.62% and 6.84%, respectively.

The Nifty Pharma sector also gained, rising 1.25%, with Sun Pharma and Lupin increasing by over 2%. The Metal Index rose 2.54%, while the Realty and Media sectors gained 1.38% and 1.96%, respectively. The broader market breadth was positive, with 1,730 advances and 817 declines. In the broader Nifty 500 Index, the breadth remained positive, with an advance-to-decline ratio of 342 to 158, and stocks like First Source Solutions, Indian Bank, and Bandhan Bank rallied over 10% each.

In corporate results released today, Indian Oil Corporation (IOC) reported subdued earnings. The market had expected revenue of ₹1.9 lakh crore for Q2 and a net profit of around ₹3,278 crore, but the results showed revenue of ₹1.74 lakh crore and a net profit of ₹180 crore. The biggest disappointment was the margin, which recorded at 2.2%, far below the analyst consensus of 6%.

Conversely, Sun Pharma reported a revenue increase of 9% and a net profit rise of 27.5% year-on-year for the second quarter. BHEL’s corporate results were a positive surprise, showing a net profit of ₹97 crore against market expectations of a ₹99.7 crore loss. However, with revenue at ₹658 crore and a margin of 4.2%, the results were not particularly encouraging. The BHEL stock gained around 10% following the announcement, ultimately settling up 6.5% due to short covering.

Index Outlook:

NIFTY: The Nifty Index is likely to limit any further selling as long as prices hold above the 24,100-24,150 range. However, failure to maintain this level may lead to a decline toward 23,900. Conversely, the 24,480-24,500 range may act as a resistance zone, and a breakout above this range could push the index toward 24,650.

BANK NIFTY: The Bank Nifty Index has strong support in the 50,950-51,000 range. If this support level is breached, we may see the index decline toward the 50,300-50,400 range. Conversely, the resistance at 51,600-51,650 is crucial; a convincing breakout above this zone could propel the Bank Index toward the 52,000 mark.

NIFTY MIDCAP: The Nifty Midcap Index may remain in a recovery phase as long as it holds the 12,350-12,380 range. Sustained trading above this zone could extend a short covering rally toward the 12,500 level. If the index breaks below 12,350, it may test the 12,280 level. 

This report is prepared by Bitupan Majumdar, an independent SEBI-registered research analyst (registration code INH30006962). Please consult your financial advisor before making any investment decisions.

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