stock market: Markets poised for a relief rally amid India-Pak ceasefire

Mumbai: Equity indices are poised for a relief rally Monday after the weekend announcement of a “pause” in hostilities with Pakistan, although the breather could well be short-lived if the situation along the border were to worsen yet again.

Both benchmark indices declined around 1.3% over the past week, including a 1.1% fall on Friday, as concerns of a full-scale conflict prompted traders to liquidate their bets ahead of the weekend.

“There was apprehension among investors, especially at the fag end of the week, due to the rising tensions between India and Pakistan, which led to lightened positions,” said Lakshmi Iyer, CEO-Investment & Strategy, Kotak Alternate Asset Managers. “The ceasefire is a big respite and is expected to trigger a relief rally on Monday.”

Iyer noted that while markets may react positively to de-escalation, a sharp upmove is unlikely.

Valuations Remain Elevated

Trading could remain choppy in the near term as geopolitical developments continue to weigh on sentiment, according to Iyer.

The truce between India and Pakistan is shrouded in an uneasy calm, as both countries have accused each other of violating the ceasefire.

The Volatility Index (VIX), often referred to as the market’s fear gauge, surged 16.4% to 21.63 over the past five sessions, indicating heightened risk perception among traders.

Foreign portfolio investors (FPIs) sold shares worth a net ₹3,798 crore on Friday-turning sellers for the first time in 16 trading sessions. Domestic institutional investors (DIIs) bought shares worth ₹7,278 crore. So far in May, FPIs have bought equities worth ₹9,257.95 crore after purchasing ₹3,416.08 crore in April.

Calm After the Storm
“The markets were holding up despite the geopolitical noise. Now that some uncertainty has receded, they are expected to breathe a little easier,” said Mahesh Patil, CIO, Aditya Birla Sun Life AMC.

Patil said traders who built bearish positions ahead of the weekend could not rush to liquidate their positions and that could push the markets higher. Still, he warned that current valuations remain elevated, which may limit any sharp rally.

Iyer also expects the upside to be capped.

“When the conflict first broke out, the markets didn’t crash in a big way. So while there may not be a sharp rebound, respite buying is expected now that some uncertainty is out of the way,” Iyer said.

Patil noted that domestic investors had been cautious in deploying funds, and this withheld capital could gradually enter the markets in the coming days.