NEW DELHI : Benchmark indices surged more than 2% on Monday as the HDFC mega-merger, the return of foreign portfolio investors and the decline in oil prices cheered the market. The softening of oil prices is positive for the Indian economy and the rupee and, coupled with cooling commodity prices, can provide some respite from inflationary pressures.

Benchmark Sensex and Nifty indices have gained 5.24% and 4.83% in the past week, respectively.

Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd, said, “Domestic equities surged higher backed by renewed buying by foreign institutional investors (FIIs) and the announcement of the merger of heavyweight HDFC twins". Sentiments are upbeat given strong economic data, including record exports and tax collections, and robust port handling, he added.

Deepak Jasani, head of retail research at HDFC Securities Ltd, said some foreign portfolio investors (FPIs) had oversold their shares, and hence, some amount of buying was expected. Global markets have also been stable, he added.

Srikant Chouhan, head of retail research at Kotak Securities Ltd, said FII interest remains in financials and public sector enterprises. Selective buying has been seen in the metals and pharmaceutical sectors, he added.

Varun Saboo, director of institutional equities at Prabhudas Lilladher, said the Nifty holding of FIIs was at all-time lows until last quarter. This quarter, it would have gone down further; hence, we are seeing a moderation in flows, he said.

While the moderation of flows and some amount of FPI buying is positive for equity markets, there are some words of caution too. There are uncertainties associated with the resolution of the Russia-Ukraine conflict, and there are no clear timelines for the resolution. Jasani of HDFC Securities said the impact of the pandemic-related disruptions and the latest war on India would be clear as we progress during the year.

Even analysts at HSBC Securities and Capital Markets (India) Pvt. Ltd, in their 30 March report, said FII flows as a percentage of market cap are now at decade-low levels and, barring a tail risk, appear to have bottomed. However, a prolonged conflict may still trigger further selling, and they estimate around $7-8 billion in outflows in such a scenario, similar to the levels seen during the global financial crisis.

Further, the risk of continued FII selling is also led by the possibility of more Fed rate hikes down the line. Corporate earnings expectations and valuations of the market also remain important for driving FII flows.

Analysts at Kotak Institutional Equities said FIIs have decent ownership of Indian stocks, and their future action in terms of buying and selling will be largely determined by return expectations linked to valuations of the market and stocks.

Nishit Master, portfolio manager, Axis Securities, said March-quarter earnings commentaries remain critical. Further, the number of downgrades to upgrades will have to be monitored for the quarter (due to the higher input cost pressure), which will drive market fundamentals. On the outlook for FY23, Master expects FY23 to see continued volatility in equity markets, especially in the first half of the year with rising interest rates globally and high inflation. He, however, expects money to move from long-duration debt funds to equity funds in the second half, which should bode well for equities.