After tumble, the dizzying climb

Today’s rise, the highest single-day gain in four years, came after the Moody’s upgrade and amid speculation that the Securities and Exchange Board of India (SEBI) would clarify its stand on the usage of participatory notes by foreign hedge funds.

SEBI, in fact, did clarify after close of trade that P-Notes can be issued only to regulated entities from February 2004. It also said that these instruments could be transferred only to other regulated entities.FIIs have invested over $4 billion through the PN route in the last one year. The PN is a contract issued by FIIs to overseas clients who want secrecy.

Investors who saw their wealth depreciating by a huge Rs 1,26,000 crore in the last three days found it bouncing back partially. Total market capitalisation—market value of all listed shares—recovered by Rs 58,100 crore to Rs 12,04,070 crore.

Operators, who were speculating on a ban on participatory notes, unwinding in derivatives segment and resorting to margin sales, rushed to cover short positions as the mood on the market turned bullish during the late trading hours.

Moody’s decision to upgrade India’s foreign currency rating to investment grade also added to the optimism. ‘‘Foreign investment into India will rise in the coming years following the upgrade,’’ said a BSE dealer.

Another factor which was the cause of the decline, and could also be the cause of this huge bounceback is the derivatives segment. There were fears that large-scale unwinding in the futures & options segment would exert further downside pressure on the cash segment. But these fears were later found baseless, say brokers.

Buying was seen almost across-the-board. Old economy—automobile, power and cement—stocks rose on renewed buying on improved quarterly results. Tech stocks firmed up on strong show from Indian ADRs listed on the US bourses. Heavyweights like Reliance, Infosys, SBI and HLL contributed significantly to the gains of the Sensex.

But investors were once again driven to the sidelines by the huge volatility. Sensex opened firm with a 52.59-point gap at 5,646.33 and rose further to 5,708.60 during mid-morning trades. However, selling at higher levels pulled down the Sensex to the day’s low of 5,596.57.

After moving in a narrow range for a while, the Sensex gained momentum around 1:30 pm. Buying intensified as bears cut their short positions towards the close of trade. Eventually, the Sensex ended at 5,816.64.

Meanwhile, FIIs remained net buyers. They invested a net Rs 134.70 crore on Wednesday (January 21), compared to the inflow of Rs 344 crore on Tuesday. With Tuesday’s inflows, FII investmaents so far this month (till 21 January) touched Rs 2,177.80 crore.

Improved quarterly performance from corporate has been another driving force behind the recovery.

Out of nearly 500 companies’ results, results of 440 comparable companies indicates a 49% growth in net profit on a 17% rise in sales.