Mumbai: Positive global markets and renewed expectations that the euro zone’s economic crisis may abate pushed Indian stocks to a 2.23% gain, their highest in two weeks.

Concerns linger: A file photo of the BSE building in Mumbai. Photo: Hemant Mishra/Mint.

The Sensex pared early gains to end at 16,483.45, up 359.99 points. The broader 50-share Nifty of the National Stock Exchange (NSE) surged 104.80 points, or 2.2%, to 4,936.85.

Market experts attributed the day’s gains mostly to short covering, but cautioned that the rally may not be sustainable with uncertainty looming over the euro zone in the absence of a solution, the rupee continuing to be in the danger zone, persistent inflationary pressure, a slowing economy and political stalemate over liberalization of the Indian retail industry.

Watch Video

Mint’s Krishna Merchant gives you the lowdown on the surge in Indian markets on Thursday.

Loading Video

“We have seen short covering in the past few days because of the developments in the United States and Europe," said Manishi Raychaudhuri, managing director, head of research, BNP Paribas Securities. “Short positions were possibly built up in some sectors including banks and infrastructure."

Short covering involves purchase of securities to close an open short position. Typically, traders cover their short positions whenever they speculate that the securities will rise.

On Wednesday, the US Federal Reserve, the European Central Bank, the Bank of Japan and the central banks of Britain, Canada and Switzerland agreed upon synchronized action to rescue the euro zone from its worsening sovereign debt crisis by providing cheaper dollar liquidity to cash-strapped European banks.

Coupled with this, China’s central bank eased its monetary stance to allow banks to set aside less money for loans in an effort to boost the economy. The moves sparked speculation about a pause in rate increases by India’s central bank and a resumption in the flow of foreign funds into the world’s second fastest growing economy.

Global markets, elsewhere, cheered the move. Japan’s Nikkei Stock Average advanced 1.93%, China’s Shanghai Composite gained 2.29% and the Hang Seng Index jumped 5.63%.

The rally in India was tempered by the UK’s November PMI, which fell to 47.6 from 47.8 in October, adding to worries about the euro zone’s recovery.

It was too early to predict a change in the mood in time for the year-end holiday season, experts said.

“You cannot douse fire by fire, central banks are just printing money to ease the pain," said Nilesh Shah, president, corporate banking, Axis Bank.

Saurabh Mukherjea, head of equities at Ambit Capital Pvt. Ltd, agreed.

“This is just a desperate intervention by the central banks to inject liquidity into the market and calm the fears in Europe," he said.

“This rally is not sustainable because it does not address fundamental problem of fiscal imbalance," he said.

As many as 1,689 stocks on the BSE advanced against 1,114 declines. Metal, banking and realty indices led the rally, guided Hindalco (7%), ICICI Bank (6.76%), Sterlite Industries (6.19%) and Tata Motors (6%), the latter on the back of strong production numbers that were released on Thursday by auto firms.

Foreign institutional investors (FIIs), the key drivers of Indian stocks, were net buyers of equity worth 687.26 crore on Thursday, while domestic institutional investors bought stocks worth a net 718.08 crore, according to provisional data on the NSE website. FIIs are net sellers of Indian stocks worth $500.2 million in the current year so far. The rupee surged the most in a month, up 1.4%, but continues to be in an uncomfortable zone at 51.47 per dollar.

“Apart from the global developments, we are facing domestic headwinds," Raychaudhuri said. “Sticky inflation, high fiscal and current account deficit and slowdown in project approvals are some such headwinds."