However, in the first sign of caution in a blistering rally, retail and wealthy investors initiated cumulative short positions of 11,738 contracts on Nifty and Bank Nifty futures on Monday, after being net buyers for over two months. To be sure, foreign portfolio investors (FPIs) cut their cumulative net shorts sharply to 25,358 contracts from 47,161 contracts on Friday.

Driven by institutional purchases and index futures’ short-covering by FPIs, the Nifty and the Sensex rose over 2% each, the most in a single session since 4 October 2022. The benchmarks vaulted to their highest-ever levels of 20,702.65 and 68,918.22 during the day, before closing at all-time highs of 20,686.80 and 68,865.12, gaining 418.90 points and 1,383.93 points, respectively.

In contrast, when the BJP lost power in the three states of Rajasthan, Madhya Pradesh and Chhattisgarh five years ago, the markets had closed flat.

Domestic institutional investors (DIIs) net purchased a provisional 4,797.15 crore of shares while FPIs bought shares worth 2,073.21 crore. The sectoral Bank Nifty index rose a whopping 3.6%, its highest in over four years, to 46,431.40, led by ICICI Bank Ltd, which gained 4.7%.

“Investors perceive that there is a Modi premium behind a structurally different bull market that they’ve seen before,” said A. Balasubramanian, managing director and CEO, Aditya Birla Sun Life Asset Management Co. Ltd. “It’s a market in which domestic investors can act as an effective counterweight to FPIs, thanks to a spectacular rise in participation of retail investors through mutual funds and directly.”

“The faith of the retail investor is based on delivery of sustainable growth, as seen in the second quarter GDP (gross domestic product) data, which shows the growing share of the manufacturing sector led by the government’s infrastructure spending, which is also leading to private capex,” Balasubramanian added.

The Indian economy expanded by a faster-than-expected 7.6% in the September quarter, led by 13.9% growth in manufacturing, which Balasubramanian views as a significant development in India’s growth story led by the services sector.

“Voters and investors perceive these changes and are giving them more heft than mere freebies being doled out by political parties,” he added.

Andrew Holland, CEO, Avendus Alternate Capital Strategies, said Monday’s rally reflected a Modi premium, outlier domestic economic growth and softening yields globally.

“Looks like you have an early Santa rally underway, with the sheer sweep of the Narendra Modi-led BJP in the three states calming market fears of fiscal loosening ahead of the national elections,” Holland said. “The spectacular GDP growth of the September quarter and softening US yields added more legs to the rally.”

The BSE Midcap and Smallcap indices also hit their fresh highs of 35,124.23 and 41,221.91 respectively. Eventually, the BSE Midcap index closed 1.19% higher at 34,999.76 while the Smallcap index ended 1.20% higher at 41,051.01.

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However, despite Monday’s euphoria, retail and high networth individuals (HNIs) and proprietary traders began hedging their stock portfolios by turning short on index futures. A hedge involves a market participant taking opposite positions on the same asset in two different market segments.

The retail and HNI category turned net short by a cumulative 11,738 contracts on the National Stock Exchange. Rohit Srivastava, founder, IndiaCharts, interpreted this as an “early sign of caution” after a 23% Nifty rally from the low of 16,828 on 20 March to a 4 December peak. “This means they want to hedge against any possible volatility in markets after a strong rally since March,” he said.

Avendus’s Holland expects large-cap banks to drive the rally, especially after last month’s Reserve Bank of India circular, which increased the risk weights on unsecured consumer loans to 125% from 100% earlier.

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