Equity benchmarks ended at their highest level since May 2008 on Thursday, aided by a late rally after traders covered their short positions ahead of a prolonged weekend. With the Nifty close to a critical hurdle at 5200 and the possibility of a rally in US equities over the next couple of sessions remaining high, traders were unwilling to be caught on the wrong foot on Tuesday. Markets are closed on Friday and Monday.

We are at a level where we think a breakout for the Nifty is possible, as sentiment has improved over the last two sessions, said Anita Gandhi, head-institutional business, Arihant Capital Markets. NSEs Nifty closed at 5178.40, up 33.80 points or 0.66%, its highest close since May 5, 2008.

BSE's 30-share Sensex ended at its highest close since May 16, 2008, at 17,360.61, up 129.50 points or 0.75%. In the broader market, gainers outnumbered losers at 1598:1253 on the BSE.

The Nifty has moved in the 4800-5200 range in the last two months, as concerns that stock valuations are stretched sparked selling at the upper end of this band, while investors, who missed the rally since March 2009, bought above 4800.
Benchmark indices have almost doubled since March 10, 2009, aided by buying from foreign investors worth $15 billion.

The Sensex has risen 80% in 2009, more than 72% increase in the MSCI emerging market index, as investors become increasingly optimistic about the prospects of the Indian economy.

On Wednesday, foreign institutional net bought shares worth Rs769.53 crore. Their local counterparts kept purchases to the minimum at Rs13.02 crore.

Despite the possibility of further upsides near-term, brokers advice investors to trim exposure to stocks, as outlook remains uncertain in January, when the Reserve Bank of India is expected to announce measures to mop up excess money from banks. The wider consensus is a 25 basis point-hike in the cash reserve ratio or CRR--the minimum amount that banks need to maintain with the central bank. Some market participants see a sell-off in stocks, if the CRR hike is higher-than-expected.

But there is no consensus on future direction because many investors are increasingly bullish about third-quarter results due in January, both for sectors as automobiles which rely on domestic demand and for businesses such as software which will benefit in the wake of a global recovery.

"The key risks remain rising inflation and the consequent aggressive tightening of interest rates by the central bank. While current market levels reflect some of this expectation, any surprises could lead to volatility," said Fidelity International's fund managers, in a recent report.