Bulls are positioning for a 500-600 point rally in the benchmark Nifty50 index early this week, driven primarily by expectations of an eventual peace deal in West Asia and a sentimental boost from a potential Bharatiya Janata Party (BJP) victory in the West Bengal state elections.
"We are pencilling in an average $85/bbl for Brent this fiscal year on hopes of a peace deal in West Asia by mid-May," said Sanjeev Prasad, co-head, Kotak Institutional Equities (KIE). "That will contain the CAD at 2% (of GDP), which is the base or bad case. But, if oil averages $100 or more on a prolonged impasse or escalation, then we get an ugly scene with CAD at 2.6% , and a more adverse hit on macros."
Both the scenarios for current account deficit (CAD) assume lower exports and lower non-oil imports and lower remittances. A current account deficit occurs when a country's total imports and transfers exceed its total exports and transfers out.
A win for the BJP in West Bengal may result in "brief cheer" for the market, while the "oil versus macro-calculus" may continue to dominate the discourse, Prasad added.
The immediate bullish optimism is riding on factors alluded to by Prasad—especially of a final peace deal in West Asia. This is borne out by data, which showed that the fear gauge India Vix jumped by less than 6% to 18.46 on Thursday, when oil spiked briefly by 7% to a four-year high of $126 per barrel over concerns of a prolonged impasse in peace talks, before reversing course to close 3.4% lower at $114.01 on hopes of a deal.
This was in sharp contrast to 9 March, in the early stages of the conflict, when the Vix spiked 17.51% to 23.36 with crude surging to $120 at the height of hostilities which began on 28 February.
"The moderate rise in Vix on Thursday reflects the optimism of the market despite the oil spike, said Rajesh Palviya, senior vice-president (technical & derivatives research) at Axis Securities. "This is very unlike what happened when oil hit $120 in March, when panic was palpable, and discounts an immediate rally toward 24500-24600 levels, subject to no negative surprises."
Indian markets were closed on Friday for Maharashtra Day, when crude oil fell another 5% to settle at $108.17 after Iran proposed a further round of peace talks. The fall in oil price was partly behind the US S&P 500 index's rally to a record high of 7272.52 on Friday.
The Nifty plunged 12% from 25,178.65 on 27 February, when the war began, to a 52-week low of 22,182.55 on 2 April. Since then, the index has recovered 8% to close at 23,997.55 on Thursday amid bets of a quick resolution to the war.
Buyers option
Nifty weekly options expiring on 5 May saw heavy buying in the 24000 call, with open interest—a gauge of money flowing into the market—jumping 142%—to 79,314 contracts, as the index recovered 0.8% from the day's low to end down 0.74% at 23,997.55 on Thursday.
By the end of Thursday's session, the contract closed 33% above its volume weighted average price (VWAP)—the price at which maximum volumes happened—to end at ₹221.5 a share (65 shares make one Nifty contract).
A close above VWAP is a bullish sign while a close below is bearish.
"The market will try to rally to 24500-24600, which was its high last month, early next week, if there are no negative surprises," said Sudhir Joshi, consultant, Khambatta Securities.
The US and Iran haven't resumed fighting after reaching a ceasefire on 8 April, although a peace deal remains elusive. Results for 4 state assembly elections and one Union territory—Assam, Kerala, Tamil Nadu, West Bengal and Puducherry—are scheduled for Monday.
However, all eyes are on West Bengal, where incumbent Chief Minister Mamata Banerjee of the Trinamool Congress faces a tough challenge from the BJP, which is seeking to deny her a fourth consecutive term.