Market may extend gains on short-covering ahead of F&O expiry

The sentiment on the stock market remains upbeat on upgrade in earnings of India Inc as a comfortable victory for the Congress-led United Progressive Alliance (UPA) in election means political stability for the next five years. Investors are likely to use a correction in prices to accumulate stocks.

Foreign funds may continue buying on expectations of a strong push for economic reforms by the government. Foreign funds bought Rs 15281.60 crore more shares than they sold in this month, till 21 May 2009 and bought Rs 15638.10-crore more shares than they sold in calendar 2009. Mutual funds which are sitting on a large cash pile are also likely to buy on dips.

In the near term, short-covering may push the market further higher ahead of the expiry of May 2009 derivatives contracts on Thursday, 28 May 2009. Volatility may rise as traders rollover positions to June 2009 contracts in the futures & options (F&O) segment.

A comfortable victory for the Congress-led coalition government in election has raised expectations of a strong push for economic reforms by the government. Dr Manmohan Singh who will be sworn in as the Prime Minister has reportedly prepared the broad contours of an economic revival plan to be taken up soon after the new government is formed, reports suggest. While recommendations to revive growth and ease the credit squeeze are likely to find a place in the plan, tax proposals are expected to be taken up as budget recommendations.

The new government is also likely to pursue disinvestment of state-run undertakings, reports suggest. Financial sector reforms are likely to get a push in the coming days, which were relegated to the back seat due to persistent opposition from the Left parties.

Investors are awaiting the allocation of the portfolio of key ministries in the new government. It remains to be seen who get the key ministries viz. power, transport and education sectors. Analysts say growth in these three sectors are key for India to achieve strong economic growth. If those seen as strong performers are given charge of these three ministries, the market may extend gains. As per reports, Congress's strong showing in election means reformers will almost certainly be named to key ministerial portfolios viz. finance, trade, defence and foreign affairs.

Morgan Stanley had raised India's stocks to “overweight” from “underweight,” saying never before had its model recommended overweighting India. The two-step upgrade reflected improvements in political risk, outlook for the business cycle and earnings growth, it said in a report on Monday, 18 May 2009.