FPIs may cut bearish bets, releasing bulls on D-Street today

The pace of the upsides on Monday will depend on the extent to which FPIs will reduce these bets ahead of the vote count on June 4. Most analysts are expecting overseas investors to cover a larger portion of these bets on the back of the exit polls announced on Saturday evening that could push the benchmark indices - the and Nifty - up by around 2-3%.

"With exit polls hinting towards the continuation of the ruling government with a thumping majority, we should see significant index short covering in the markets on Monday, potentially leading to a movement of up to 700-800 points (Nifty) and new highs in the next two-three days," said Nuvama alternative and quantitative research head Abhilash Pagaria.

FPIs sold Indian shares and simultaneously built bearish derivative positions in the past month amid uncertainty over the BJP's showing in the elections and shifts in money allocation to China on concerns over rich valuations of India equities. The Nifty declined almost 2% in five trading sessions until Friday, when the downtrend was broken.

Although unabated domestic flows averted a sharper market slide, the undertone has been nervous, reflected in the 83% surge in the Volatility Index (VIX), the market's fear gauge, which rose to a two-year high of 24.6 on Friday. A rising suggests traders foresee risks to the markets in the near term.

While foreign investors have built up their highest-ever bearish wagers in index futures, they are also holding in single stock futures worth $4.7 billion or Rs 39,300 crore, according to Nuvama. Meanwhile, (HNIs) and retail traders are holding record stock futures positions of $19.3 billion, or Rs 1.61 lakh crore, said the brokerage.

The Nifty could rise to as much as 23,100 on Monday, said Sahaj Agrawal, head of derivatives research at . That's about 2.5% up from Friday's close of 22,530.70.

"We believe an upmove till 23,100 is highly possible and any sustenance above this resistance level is expected to further invite short covering by FPIs," said Agrawal. "Above this level, the index will be trading at all-time high levels and movements could be aggressive on account of the results." The Nifty's all-time closing high is 22,967.65, set on May 23.

According to Mehul Kothari, deputy vice president, technical research, , FPIs' bearish positions in index futures had entered the "oversold" zone. "In the coming session and on result day, if the Nifty sustains at higher levels, then we expect heavy short covering by the FPIs in index futures," he said.

The exit polls after the last phase of the election ended on Saturday evening showed the BJP-led National Democratic Alliance (NDA) coalition winning with a comfortable majority. Though some exit polls have been inaccurate in the past, investors will take comfort from the fact that most of them are forecasting a strong showing by the BJP.

To be sure, some analysts do not expect a big move in the market.

"We may not see significant short covering on Monday as historically, in the last two elections also, the day prior to results we have not seen big movements in the markets," said Rohit Srivastava, founder of indiacharts.com. "On the day of results, we may see a lot of intraday volatility but not significant gains as per historical trends."

Beyond the euphoria around the election results, the market might struggle to keep the bullish momentum going in the near term.