MUMBAI : Stocks witnessed a strong relief rally on Tuesday, aided by short-covering, a slight respite in foreign investors’ selling and improved global cues. However, analysts expect the rally to be short-lived, as high inflation, steep crude prices and a weak rupee put pressure on corporate earnings.

The Sensex and Nifty ended the day with gains of 2.54% and 2.63%, closing 1,344.63 points and 417 points higher at 54,318.47 and 16,259.30, respectively. The gains were supported by metals, oil & gas and a few other sectors, with the BSE metals index surging 7.62%. Others such as basic materials, oil & gas, energy, telecom, industrials and capital goods indexes saw gains of more than 3%.

Shrikant Chouhan, head of equity research (retail) at Kotak Securities Ltd, said the markets witnessed a sharp relief rally as the recent slump had put key indices in oversold territory. Traders covered their short positions in several beaten-down stocks, propelling key benchmarks.

Positive cues on China in terms of opening up its economy were supportive as well, analysts said. Asian indices such as Nikkei, Jakarta Composite, Shanghai Composite and Hang Seng ended 0.42-3.27% higher.

“A sharp uptick in the market was propelled by short-covering seen in several large-caps and especially in sectors like metals which were deeply oversold," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd. Foreign institutional investors (FIIs), too, have slowed their pace of selling, he added.

FIIs, which have been net sellers of equities worth Rs1,54,159.83 crore in 2022 till 16 May, were net sellers of Rs2,192 crore worth of equities on Tuesday as per provisional data from exchanges.

However, the rally could be short-lived, and volatility may stay, as high inflation, costly crude oil and a rupee at record lows add to market concerns. Data released on Tuesday showed steep wholesale price inflation of 15.08% in April, driven by a rise in prices across the board, with manufactured products and fuel and power leading the charge. This is expected to pressure corporate earnings growth as well.

“Higher energy and metals prices due to supply-side bottlenecks have added to the input cost pressures for domestic producers. As inflation is primarily supply-driven, we expect upward price pressures to persist in the near term," said Rajani Sinha, chief economist at CARE Ratings.

The rupee opened at an all-time low against the dollar on Tuesday. Disappointing Chinese economic data, further clarity on US Federal Reserve & ECB rate hikes, rising crude oil prices, and a correction in the domestic equity markets have led to the rupee depreciation, said analysts. The cut in India’s GDP projections has also added to the rupee’s woes.

“USD-INR spot scored a new high at 77.78 but closed off its high at 77.56. A new high and then suspected intervention from RBI and USD-INR drifting down towards unchanged levels has been the pattern over the last few trading sessions," said Anindya Banerjee, vice-president, currency derivatives & interest rate derivatives at Kotak Securities Ltd.

Given the macro-economic headwinds, the currency desk of Emkay Global expects gains for the rupee to be limited until levels around 77 hold, and the currency can slip towards 78 levels. At $116.03 a barrel, Brent has risen sharply from closing lows of $101.95 a barrel seen on 10 May, adding to pressure on the rupee.

The rally could be short-lived as unabated FII selling and concerns of further rate hikes to tame inflation may fuel volatility, Chouhan said.

Concerns over inflation and interest rate hike could cap the upside, Khemka said, adding that investors will closely monitor the US Federal Reserve chair’s speech scheduled later on Tuesday. Also, investors will keep an eye on eurozone GDP data for the first quarter due later Tuesday.

Globally, the Russia-Ukraine crisis and supply disruptions continue to threaten global and Indian equities, said Mitul Shah, head of research at Reliance Securities.