Foreign institutional flows would play a key role in deciding the stock market's direction in the week ahead.
While volatility was expected to heighten in the run-up to the expiry of November futures and options (F&O) contracts, investors would also watch key domestic economic data, including September quarter gross domestic product (GDP) and April-October fiscal deficit, due on Friday.
After remaining net buyers for 32 straight trading days, foreign investors turned net sellers on Thursday and Friday, sparking worries that this might be the end of the recent rush of inflows or the start of outflows. Markets turned jittery after investors construed details in the minutes of the US Federal Reserve's October meeting, released on Wednesday, as a signal that the withdrawal of the monetary stimulus might start sooner-than-expected. Till then, the Fed was expected to start the tapering of the bond-buying programme - the Quantitative Easing (QE)-3 - only in the later part of the January-March period.
"Till the time frame for the tapering of the QE3 is fixed, there will be some pressure on equity markets," said Niraj Kumar, head (equity investments), Aviva Life Insurance. "But if the Fed indicates that the US economy is not yet out of the woods and that the tapering could be delayed till March, then markets would be relieved."
Indices declined three per cent through the week, with the National Stock Exchange (NSE) Nifty closing below the psychological 6,000 mark. The BSE Sensex closed at 20,217, while the NSE Nifty ended the week at 5,995.
Foreign institutional investors (FIIs) turned net sellers on Thursday at Rs 40 crore, ending a 32-day buying streak. They were net sellers on Friday as well, at only Rs 2 crore, according to the provisional data. However, through the week they were net buyers at Rs 1,924 crore.
Analysts said they expect the Nifty to trade within the 5,900-6,200 range in the week. While the upside has been capped at 6,150, the downside could be around 5,900, they said.
"We believe markets are going to remain volatile and continue the downward trend," said Sahaj Agrawal, deputy vice-president (derivatives research), Kotak Securities. "A decline in the Nifty up to 5,900-levels would still be seen as healthy, but a fall below these levels could be worrisome."
Market participants said they expect heavy volatility to set in ahead of the November derivatives contracts expiry on Thursday. However, the quantum of rollover settlements could be lower as compared with the previous months' numbers.
"Rollovers will happen but not as much (as earlier) because investors would want to wait for the state election results before taking fresh positions," said Sudip Bandyopadhyay, managing director and CEO, Destimoney Securities. "We may not see too many positions being taken in this expiry session."
Counting of votes for the five state elections would begin on December 8 and was expected to be completed by December 11. While Chhattisgarh and Madhya Pradesh have already voted, Delhi, Mizoram and Rajasthan were yet to go to polls.
Markets are also expecting stock-specific action as the MSCI adds shares of YES Bank, Tech Mahindra and Nestle India to the MSCI India Index after Tuesday's close. Analysts said they expect these stocks to gain momentum ahead of their inclusion in the index.
Tech Mahindra is already up about 79 per cent since January. Nestle India is up 9.5 per cent while YES Bank has declined 26 per cent during the same period.
Shares of Bank of India, Canara Bank, Wockhardt and Unitech would be dropped after Tuesday's close.