New Delhi: After two days of consecutive selling, the Indian markets bounced back with the benchmark indices gaining over 1% on Friday. The Sensex ended at 37,556.16, up 391 points or 1.05%, while Nifty closed at 11,360.80, up 116.10 points or 1.03%.

Mid- and small-cap stocks have been in vogue again. In the last two weeks, the BSE Midcap and the BSE Smallcap gained 7.66% and 6.6%, respectively, outperforming the Sensex, which gained 3.4%.

Global markets were also supportive after the sharp sell-off on Thursday. Asian stocks were a mixed bag as investors continued to be cautious about the US raising tariffs on Chinese imports.

Analysts said that investors’ sentiment for local equities turned positive on normal monsoon forecast, while moderation in oil prices aided momentum. However, underlying concerns on steep valuations, and the fear of trade and currency wars remain.

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“The market turned to positive terrain after two days of selling on (India Meteorological Department) predictions of favourable distribution of rainfall, and the outperformance in banking stocks supported the rally. Further, consecutive growth in India’s service PMI data and moderation in oil prices supported the positive momentum in the market. On the other side, global markets also recovered from yesterday’s fall," said Vinod Nair, head of research, Geojit Financial Services Ltd.

IMD forecasts near-normal rains in August and September, besides favourable distribution of rainfall. It added that the rainfall for India as a whole is likely to be 95% of the long-period average (LPA) during the two months.

The movement of the markets will depend on institutional buying and, if they resort to big selling, traders will not be able to withstand or absorb that sell-off in the current scenario, according to Deepak Jasani, head of retail research at HDFC Securities.

“There was institutional buying today (Friday) in banks and metals which led the rally. Buying was also concentrated in select index heavyweights offset by some selling in non-index stocks. This was versus large net selling on Thursday by both categories of institutions," he said. However, he also said that concerns over a global trade war and currency war remain.

India remains one of the most expensive markets, among peers. According to Bloomberg estimates, the price-to-earnings ratio of the Sensex based on the one-year forward earnings is 18.68 times higher than the 11.32 times and 15.42 times of the MSCI Emerging Markets and MSCI World, respectively.

“We believe the current premium valuations have their underpinnings on superior earnings growth expectations and any disappointment on the earnings front could lead to de-rating of valuations. We have a neutral rating on the Nifty 50 at these levels and maintain our March 2019 target of 11,500," said ICICI Securities Ltd, in a note on 2 August.

So far this year, foreign institutional investors were net sellers of Indian equities worth $453.80 million, while domestic institutional investors have bought 66,014.87 crore worth equities.