Markets Rally on Global Cues and Dollar Weakness
Indian equity markets witnessed a significant upswing on Wednesday, climbing closer to their historic peaks as global markets surged on the back of a weakening US dollar and growing expectations of interest rate cuts by the Federal Reserve. The benchmark Nifty index jumped by 1.24% to reach 26,205 points, coming within striking distance of its all-time high of 26,277.35 recorded on September 27 last year.
Similarly, the Sensex rallied 1.21% to close at 85,609, approaching its record level of 85,978 achieved on the same date in the previous year. This bullish momentum was primarily driven by heavyweight constituents including HDFC Bank, Reliance Industries, and ICICI Bank, which collectively contributed 0.36% to the Nifty's gains.
Global Factors Driving the Surge
The rally finds its roots in international market dynamics, particularly the 0.52% decline in the dollar index over two trading sessions. A weaker US currency typically makes emerging markets like India more attractive to foreign capital, sparking what analysts term a 'risk-on' trade environment.
Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, confirmed this trend, stating, "The weaker dollar has spurred a risk-on trade globally, which benefited us." However, Gupta sounded a note of caution regarding upcoming primary share offerings worth ₹30,000 crore that could increase market volatility. "We will make a high, but it won't be a smooth ride because of the supply," he added.
Other Asian markets mirrored this positive sentiment, with Japan's Nikkei 225 advancing 1.92%, China's CSI 300 gaining 1.57%, and South Korea's Kospi surging 2.99% over three trading days.
Derivatives Data Reveals Underlying Caution
Despite the apparent bullishness, signals from the derivatives market indicate a lack of strong conviction among traders. Data reveals that Nifty futures rollovers to the December series stood at 69%, significantly lower than the three-month average of 81%, according to IIFL Capital Services.
Shrikant Chouhan, Head of Research at Kotak Securities, interpreted this development: "The rollovers of Nifty and Bank Nifty indicate a wait-and-see mode among investors and traders ahead of the Indo-US trade deal and the Fed rate decision next month."
Rajesh Palviya, Head of Technical Research at Axis Securities, provided additional context: "With the index repeatedly failing to cross its all-time high, traders expected either consolidation or further correction and chose to square off rather than carry positions forward." He noted that historically, such light positioning often leads to sharp moves in the opposite direction as savvy traders capitalize on an under-positioned market.
Foreign Investment Outlook and Valuation Concerns
The market rally occurs against a backdrop of substantial foreign portfolio investor (FPI) outflows, with ₹2.15 trillion in secondary market sales recorded so far in 2025. Market participants hope that potential US rate cuts and improved corporate earnings could reverse this trend.
George Thomas, Fund Manager at Quantum Mutual Fund, explained the potential catalyst: "If rate cuts happen and the US yields fall, FPIs may consider India again, and if the US macro stabilizes and rate cuts come through, IT spending could revive, benefiting Indian IT companies."
Valuation metrics present a mixed picture, with the Nifty currently trading at 18 times FY28 earnings. Chouhan of Kotak Securities highlighted the index's historical valuation band of 16-20x, suggesting that without a favorable trade deal, the market could retreat to 23,200 by next year-end. Conversely, a successful trade agreement could propel the Nifty to test 29,000 levels by 2026.
Technical analyst Sudeep Shah from SBI Securities identified key resistance levels, noting that any sustained move above 26,300 could trigger a fresh rally toward 26,500 and potentially 26,700.
As markets navigate these competing forces of global optimism and domestic caution, all eyes remain fixed on the US Federal Reserve's upcoming decisions and the progress of India-US trade negotiations, which will likely determine the sustainability of the current rally.
