Derivatives expiry, coupled with heightened chances of a US rate hike and a weak rupee are expected to flare up volatility in the Indian equity markets during the upcoming week.
According to market observers, investors' sentiments will be influenced by cues on the Reserve Bank of India (RBI) decision on key lending rates and further economic reforms.
"The markets are expected to be range bound and will look forward to the earnings season and the RBI policy meet, where a 25 basis points policy rate cut is widely expected after the small savings rate cuts, " predicted Devendra Nevgi, chief executive of ZyFin Advisors.
"Markets would look for clues in policy for further rate cuts. "
Investors expect the RBI to cut key lending rates on the back of the union budget's fiscal prudence measures, reduction in small savings interest rates and low inflation.
The RBI will conduct its first bi - monthly monetary policy review for 2016 - 17 on April 5.
Pankaj Sharma, head of equities for Equirus Securities, elaborated: "If RBI obliges with a 25 - 50 basis points cut, this would translate into an immediate trigger. "
"As lending will get cheaper and there would be more appetite for corporates to look at investing options in capacity creation. The retail side should also benefit, as loans would get cheaper, this will be good for end user demand. "
On the other hand, Vaibhav Agarwal, vice president and research head at Angel Broking, said that: "We expect markets to weaken ahead of the F&O (futures and options) expiry next week as traders roll over their positions. "
"However, expectations of a rate cut in the upcoming credit policy and earnings expectations could help markets rise higher, " Agarwal told IANS.
Dhruv Desai, director and chief operating officer, Tradebulls, told IANS: "Next week volatility will prevail due to expiry of current month derivative contracts. "
"Due to festival holiday traders should keep a close eye on global developments and be ready for a volatile week. "
But the biggest factor likely to play on the mind of investors will be that of a US interest rate hike in April, said Anand James, co - head, technical research desk with Geojit BNP Paribas Financial Services.
"With expectations of a US rate hike significantly up, cues towards this end, would have a bigger bearing on global markets, " James cited.
Besides, market observers pointed out that a US rate hike might even counter a monetary policy easing by the RBI.
"While the rest of the world is in a cut mode, US is exactly opposite. On a medium term basis, we think the actions of US Fed would be more important for emerging markets including India, than what RBI does in next couple of weeks, " Sharma added.
In addition, a weak rupee can unnerve investors and cap gains.
"Keep an eye out for the bullion users, as once they get back to work, we can see a lot of pent up demand from these guys to emerge, " Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS.
"This demand, along with demand from central bank can exert an upward pressure on dollar/rupee (pair). "
A sizeable section of the jewellery sector has been on a strike against a proposed hike in excise duty on non - silver jewellery in the union budget for 2016 - 17.
They have been on strike since March 2. The central government has constituted a panel to look into their demands.
On a weekly basis, the rupee weakened by 12 paise to 66. 62 - 63 (March 23) against a US dollar from its previous close of 66. 50 - 51 (March 18) to a greenback.
However, markets have shown a potential to maintain their upward momentum, even in volatile sessions, stated Nitasha Shankar, vice president for research with YES Securities.
"For the coming week, markets could turn volatile owing to the F&O expiry, however, upward momentum can prolong within this volatility, " Shankar noted.
Other analysts said that the trend in foreign fund inflows will dictate the trajectory of the equity markets. The Indian equity and debt markets have received close to $2 billion till date in March.
The National Securities Depository Limited (NSDL) figures showed that the FPIs bought Rs. 6, 340. 82 crore or $952. 79 million in the equity and debt markets from March 21 - 23.
Data with stock exchanges disclosed that the FPIs invested in stocks worth Rs. 3, 468. 68 crore during the week under review.
Conversely, the data showed that domestic institutional investors (DIIs) sold stocks worth Rs. 2, 571. 72 crore.
For the week ended March 23, the barometer 30 - scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) gained 385 points or 1. 54 percent to 25, 337. 56 points.
Similarly, the wider 50 - scrip Nifty of the National Stock Exchange (NSE) edged - up by 112. 15 points or 1. 47 percent to 7, 716. 50 points.
(Rohit Vaid can be contacted at rohit. v@ians. in)