Mumbai: Derivatives expiry, coupled with the direction of foreign funds' flow and government's efforts to build a consensus over the contours of Goods and Services Tax (GST) are expected to flare up volatility in the Indian equity markets during the upcoming week.
Market observers pointed out that investors' sentiments will be influenced by trends in rupee movement, global crude oil prices and the assessment of the demonetization impact.
"Markets would look forward to the final number of the demonetized currency in circulation coming into the banking system," Devendra Nevgi, Chief Executive of Zyfin Advisors, told IANS.
"The markets in the next year will look to post demonetization earnings season, the growth impact, progress in the GST, and the Union Budget," he said.
Dipen Shah, senior vice president and Head PCG Research, Kotak Securities elaborated that volumes might be subdued due to lack of participation from foreign investors.
"Mid-caps might see some action as the year end approaches," Shah said.
"Going ahead, markets will watch out for the quarterly results and also the upcoming budget, wherein expectations are very high as regards continuing government spending and benefits on the direct tax front."
In terms of investments, provisional figures from the stock exchanges showed a massive outflow of foreign funds worth Rs 4,476.83 crore during the trade week ended December 23.
However, the domestic investors purchased scrip worth Rs 3,967.98 crore during the week.
"Though there is near term nervousness in the market, a medium and long term outlook look really optimistic," D.K. Aggarwal, chairman and managing director, SMC Investments and Advisors, told IANS.
"So, investors with long term horizon may participate in the market and invest on the companies of those sectors, which look promising."
According to Dhruv Desai, director and Chief Operating Officer of Tradebulls, investors are expected to closely follow the global market sentiments and price movement of the Indian rupee against the US dollar.
The rupee had weakened by five paise during the trade week ended Friday. It depreciated to 67.82 against a US dollar from last week's close of 67.77 to a greenback.
"Indian equity markets are likely to trade with volatility due to short covering at lower levels in the coming sessions," Desai explained.
"Stock specific price movement can be seen in the Indian equity markets next week."
On a technical-level, the NSE Nifty is expected to correct after last week's bounce back.
"Technically, while the Nifty has bounced back marginally, the underlying trend remains down," Deepak Jasani, Head - Retail Research, HDFC Securities, told IANS.
"Further downsides are likely if the immediate supports of 7,942 is broken early next week. A pullback rally could emerge if the resistance of 8,023 is taken out."
Last week, the Indian equities markets came under the bear grip, as investors remained jittery over huge volumes of foreign funds' outflows, coupled with a weak rupee and broadly negative global cues.
The barometer 30-scrip Sensitive Index (Sensex) of the BSE plunged by 448.86 points or 1.69 per cent to close the week's trade to 26,040.70 points.
Similarly, the wider 51-scrip Nifty of the National Stock Exchange (NSE) slipped by 153.70 points or 1.89 per cent and closed to 7,985.75 points.
(With inputs from agencies)