What's Driving The Stock Market Rally?

The rally in the last few days, which saw the Sensex crossing the 37,000 levels and the Nifty crossing the 11,000 levels has largely been led by Foreign Portfolio Investors (FPIs). In fact, the net amounts being bought by FPIs is so large, it suggests a significant rally going ahead.

Huge some of money

Foreign Portfolio investors have net bought to the tune of more then Rs 8,100 crores in the month of March and this is what is driving the rally. On March 11, they net bought to the tune of Rs 3,810 crores and this is a rather large sum.

On March 8, they net bought to the tune of Rs 1,080 crores, while on March 6, the number was Rs 1,130 crores. As long as the amount being bought by Foreign Portfolio Investors sustains the markets will continue to rally going forward.

Reasons for FPI buying

The large gush of money from the international investors has come after belief that the US Fed Reserve would hold back a hike in interest rates. It's also important to remember that there is a global rally in stocks out there and it is not unique to India.

Most of the Asian and European markets have rallied a great deal and around 6-7 per cent. It would be interesting to see how the global rally shapes-up in the coming days. However, a tremendous gush of liquidity is what is pushing indices higher.

Domestic institutions selling

Indian domestic institutions have been selling in the last few days. In fact, it is highly possible that these institutions would sit on cash ahead of the outcome of the General elections.

They have net sold in the cash market to the tune of Rs 3,500 crores since the beginning of March. It would be interesting to see how the markets move from here on and if the liquidity driven rally would continue. It's also important to remember that the broader market stocks continue to languish and some of them are no way near the peaks they once were trading at.

Strategy to adopt

It would be best staying in some amount of cash. This does not mean you keep all cash, but, it is important to keep some amount of powder dry. A word of caution: do not buy into st