Why is the Indian Equity Market turning bullish over the last 2–3 days?

The recent bullishness in Indian equities could be the result of several positive triggers converging at the same time, rather than any single announcement. The key is to distinguish between developments that improve India's economic and corporate earnings outlook, those that reduce geopolitical risk, and those that merely encourage short-term trading.

I would examine them alongside FII activity, crude oil prices, short-covering, global market sentiment and domestic institutional buying before concluding what is actually driving the rally.

One important distinction: a market rally can begin on improving expectations well before the underlying economic or corporate earnings data changes. But a two- or three-day rally is not, by itself, evidence of a durable bull market.

1. What actually triggered the rally on 15–16 October 2026?

On 15 October, the Sensex surged approximately 1,534 points (2.11%) to close at 74,315.61, while the Nifty 50 gained about 375 points (1.66%) to close at 22,997.35. The recovery continued on 16 October.

A.     Cooling crude oil prices and a stronger rupee: Lower oil prices ease concerns about India's import bill, inflation, the current-account deficit and corporate margins. Rupee appreciation also helps reduce imported inflation and can improve sentiment towards Indian assets. Both were cited among the key drivers of the rally.

B.     Strong buying in IT stocks: Indian IT shares rallied for several sessions. Global weakness in some AI-linked stocks may have encouraged investors to reconsider Indian IT companies, while company earnings expectations also supported buying. This sector-specific move helped lift the indices.

C. SEBI's CAS changes and a possible recovery in derivatives volumes: On 15 October, SEBI announced that expiring derivatives contracts would again use the volume-weighted average price (VWAP) of the final 30 minutes of regular trading for settlement, effective 7 December 2026. The closing auction session will continue for applicable cash-equity securities.

The change addresses market participants' concerns about settlement-related price swings. The NSE's derivatives turnover had fallen 19.2% month-on-month in August, following the CAS implementation and amid other regulatory and cost changes.

D.    IMF's upward revision of India's GDP growth forecast: An upward revision by the IMF strengthens the perception that India's economic growth will remain resilient. This can support corporate earnings expectations, domestic consumption, investment and foreign investor confidence.

E.     India–US trade deal nearing conclusion: Confirmation by Mr. Piyush Goyal (Commerce & Industry Minister) that India – USA Trade Pact in last leg of legal drafting - could improve export visibility, reduce tariff uncertainty and benefit sectors exposed to the US market. Hopes of a resolution may influence sentiment.

F.     US–Iran tensions and the risk of a wider conflict: Any reduction in the perceived risk of disruption to Middle Eastern oil supplies can support Indian equities because India is a major crude importer. It can also ease inflationary pressure and reduce uncertainty over interest rates and the rupee.                          

T   The relevant  market signal is not simply whether fighting has subsided. It is whether the probability of an oil-supply shock has fallen. Middle Eastern tensions and risks around the Strait of Hormuz remain important, so this should be treated as a potential source of relief rather than a resolved risk.

G.    Nirmala Sitharaman's remarks on LTCG taxation: Market commentary has linked the possibility of reconsidering capital-gains taxation to improved sentiment. The finance minister has previously said the government was willing to listen to concerns about LTCG and STCG taxation.  But being open to feedback is not the same as announcing the abolition of LTCG tax.

Expectations of a more investor-friendly tax regime can support sentiment, particularly if investors anticipate lower transaction costs or greater after-tax returns. Until there is a concrete policy proposal, however, this remains speculative.

2. Other important reasons that may explain the rally:

In my view, some of these factors may be more directly responsible for the recent price action than the longer-term GDP narrative.

A. Global rotation into Indian IT stocks: Indian IT stocks have been rising for several consecutive sessions. When global investors reduce exposure to expensive AI-linked stocks or reassess their technology allocations, Indian IT companies can benefit from relative-value buying. The important question is whether the move is supported by better earnings guidance, deal wins and improved demand, rather than just a change in global positioning.

B. Cooling US Treasury yields and a softer dollar: Lower US bond yields can make emerging-market equities relatively more attractive, particularly when the dollar also weakens. This can reduce pressure on emerging-market currencies and potentially encourage foreign investors to reassess Indian equities. Falling yields were among the factors cited in the market outlook for 16 October.

C. Short-covering and technical recovery: After a sustained decline, traders who had sold futures or built bearish positions may buy them back when the market crosses important technical levels. This buying can accelerate a rally even without a comparable improvement in fundamentals. A sharp recovery can therefore contain two elements: genuine fresh buying and the forced closing of bearish positions. The latter can make a rally powerful but temporary.

D. Domestic institutional buying: Mutual funds, insurance companies and other domestic institutions can cushion foreign selling and provide support during market corrections.

The latest reporting indicated that domestic institutional demand was helping absorb foreign portfolio outflows. However, daily cash-market purchase data are needed to establish how much this contributed specifically to the two-day rally.

E. Earnings season and domestic economic resilience: Q2 earnings announcements and management guidance can drive individual stocks and entire sectors. Strong results, improving margins or better demand expectations may prompt investors to buy ahead of an earnings recovery.

The rally also extended into auto, metal and public-sector banking stocks, suggesting that buying was not limited entirely to IT. Nevertheless, broader-market participation needs to improve before this can be called a comprehensive recovery.

5. The biggest warning sign: foreign investors are still selling: This is the part I would watch most carefully. October FPI outflows had reached approximately ₹44,008 crore as of its 15 October market report, even as the benchmarks staged a sharp recovery. Mid-cap and small-cap indices also remained under pressure.

That creates an important distinction:

Bullish signal: Domestic institutions and investors are willing to buy at lower prices, oil is easing, the rupee is strengthening and selected heavyweight stocks are recovering.

Bearish warning: Foreign investors have not clearly returned in force, and the rally is not yet broad-based.

If foreign selling continues while the Nifty rises, the market may still be experiencing a tactical rebound rather than the beginning of a sustained upward trend.

My conclusion for investors

I would describe the current move as a relief rally supported by improving macroeconomic sentiment, easing oil and currency pressures, IT-sector strength, technical buying and a regulatory positive for derivatives traders.

For an investor, the key is not simply whether the Sensex and Nifty rise for two or three days. It is whether earnings, market breadth, FPI flows and macroeconomic conditions begin confirming the recovery. Investors should  avoid chasing a sharp two-day rally purely on headlines. Equally, do not assume that every rebound is a bull trap. Review valuations, earnings visibility and asset allocation before adding exposure, and consider staggered deployment rather than committing all available funds at once.

Author

Thakur Ajit Singh

(B.E, MBA, P.G Diploma in Investment & Tax Planning).

Chairman, Investor & Consumer Protection, MRCC.

Founder- Graded Financial Services - A Mall of Financial Products and Services,

Partner, M/S Quick Turtle - An Executive Placement. Training. Consulting firm,

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