The outcome of Assembly elections in five states, along with fears over an escalation in US-China trade war and volatility in crude oil prices, are expected to determine the trajectory of the key Indian equity indices next week.
Market observers opined that the direction of foreign fund flows in the backdrop of US Fed's policy decision, coupled with the upcoming macro-economic data points on industrial production and inflation will also affect investor sentiments.
"Going into the next week, undoubtedly the outcomes of state elections, US Federal Reserve policy meet and other developments from the global arena will dictate the trend of the market," said SMC Investments and Advisors' Chairman and Managing Director D.K. Aggarwal.
On Tuesday, December 11, the results of state Assembly elections in Rajasthan, Madhya Pradesh, Chattishgarh, Telangana and Mizoram will be declared. These elections are considered as a crucial indicator of public mood before the Lok Sabha elections which are due in April-May 2019.
"In the week ahead, Indices are also likely to face pressure from a global sell-off and renewed up-tick in crude oil prices," said Sahil Kapoor, Chief Market Strategist, Edelweiss Investment Research.
"State election results can cause markets to remain volatile and 1 per cent plus intra-day moves may be a common place."
Besides the outcome of the state elections, an escalation in global trade protectionist measures after the arrest of Huawei's Global CFO over alleged violation of US sanctions on Iran is expected to exert pressure on the indices.
Even an anticipated rise in crude oil prices after the Organisation of Petroleum Exporting Countries (OPEC) and Russia decided to go in for a production cut of 1.2 million barrels per day from 2019 might hinder the markets' attempts to edge higher.
The brent crude oil was priced at over $63 per barrel last Friday.
Additionally, investors will remain cautious over an expected hike in US interest rates which can potentially drive away foreign portfolio investors (FPIs) from emerging markets such as India.
Last week, provisional figures from the stock exchanges showed that foreign institutional investors (FIIs) sold stocks worth Rs 865.52 crore during the week ended December 7.
These factors are also expected to exert pressure on the Indian rupee.
According to Anindya Banerjee, Deputy Vice President for Currency and Interest Rates with Kotak Securities, the Indian rupee is expected to range from 70.50 and 72.50 against a US dollar in the coming week.
"With exit polls showing the risk of a BJP loss in key states of Rajasthan and MP, USD/INR can rally on Monday morning due to short covering from traders who are short on the US Dollar," Banerjee told IANS.
"Next week will be dominated by the election results. If BJP retains MP and at least one from Chhattisgarh and Rajasthan, then rupee can rally. However, a BJP loss can be negative for INR. The range can be large. It can between 70.50 and 72.50."
However, in the past week, the local currency moved Rs 1.21 from its previous week's close of Rs 69.59. The rupee closed at 70.80 a US dollar last Friday.
Apart from the rupee movement, markets will take cues from the macro-economic data points such as the IIP (Index of Industrial Production) and Balance of Trade figures.
The Central Statistics Office (CSO) is slated to release the macro-economic data points of IIP and CPI (consumer price index) on December 12, Wednesday.
Other key data points such as the wholesale price indexed-inflation (WPI) and the Balance of Trade data will be released on December 14.
On technical charts, the trajectory of National Stock Exchange (NSE) Nifty50 is expected to be volatile.
"Technically, while the Nifty has corrected sharply this week, the index has managed to bounce back and hold above the 50-day SMA. This gives the bulls a chance to make a comeback," HDFC Securities' Retail Research Head Deepak Jasani told IANS.
"Further, upsides are likely once the immediate resistances of 10,775 points are taken out. Crucial supports to watch for any weakness are at 10,588 points."
Last week, the Indian equity indices dipped over concerns of a resurgence of US-China trade tensions and reports of crude oil supply cut.
Consequently, the S&P BSE Sensex lost 521.05 points, or 1.43 per cent, to close at 35,673.25 points, whereas the 50-share NSE Nifty declined 187.05 points, or 1.71 per cent, to settle at 10,693.70 points.