Bulls retained their grip on the market in Thursdays F&O expiry session, but market watchers are not convinced that they will be able to hold on. Rather than genuine buying at lower levels, it was short covering of positions that fuelled the rally, brokers say. Reliance Industries was a major contributor to the uptrend, with the index heavyweight rising 5% to Rs 2,239.25. The 30-share Sensex gained 201.75 points or 1.4% to end the day at 14,421.82. The broader 50-share Nifty rose 63.20 points, or 1.5%, to 4315.85 at close. Shares from the oil and gas, information technology and metal sectors were in demand.

The market opened on a firm note tracking the positive trend in key Asian markets, but gave up some of its gains following a subdued start to European markets. In early trade, US equity market benchmark Dow Jones Industrial Average was trading over 200 points lower, testifying to the jittery mood in world markets. Market participants feel the market may remain under pressure for some time, as the huge discount in the July Nifty futures pointed to nervousness among investors. Most of the trading was largely on account of Reliance Industries doing better and short covering on the day of settlement, says VK Sharma of Anagram Stock Broking, who expects the market to weaken on Friday because of the 65-point discount in July Nifty futures. Sellers targeted real estate stocks yet again after State Bank of India said it was hiking its benchmark prime lending rate by 0.5% to 12.75% with effect from Friday, a decision that would make loans costlier for companies.

The move followed the RBIs recent move to make the money dearer to curb soaring inflation. Analysts feel other banks, too, are likely to follow SBIs footsteps. The BSE Realty index was the worst performer among sectoral indices, shedding over 2%. We judge that with rising cost pressures and with the base effect adverse for most of 2008, WPI inflation is likely to remain in double digits for most of 2008 and we expect it to average at 9.8% y-o-y in FY09, says a note from Lehman Brothers. Based on our view that inflation is yet to peak, we expect the RBI to follow up with another 25 basis points hike in repo rates in the July 29 policy and hike the CRR by another 50 basis points during the third quarter of 2008, the note added.

In a significant development, US Federal Reserve in its meeting on Wednesday held interest rates steady at 2%, as widely expected by analysts. However, it voiced concern on inflation front while stating that it was in no rush to raise rates. Major European markets and Dow futures were trading 1-2% lower in early trade. Meanwhile, crude oil prices that showed some signs of weakness on Wednesday, rebounded and were trading firm at $136 per barrel at the time of going to press. Market breadth on BSE was positive with 1,483 shares advancing as compared to 1,143 declining. The BSE mid-cap index slipped marginally while the battered BSE small-cap index gained 1.01%. Combined turnover in the cash and derivatives segment of both the stock exchanges stood at approximately Rs 1,00,000 crore, marginally better than Rs 98,600 crore on Wednesday. As per provisional data, foreign funds net sold Rs 667 crore worth of shares on Thursday, while local institutional investors absorbed some of the supply, by net buying Rs 396 crore worth of share.