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Indian stock markets are expected to rise on Monday, with foreign portfolio investors (FPIs) turning net buyers in cash over the past couple of days and closing out negative Nifty derivatives bets on Friday, according to exchange data.

Market analysts said the optimism stemmed from rising investor hopes of an India-US trade deal and the sharp rebound in the rupee.

FPIs net purchased shares worth a provisional ₹1830.89 crore, cut their bearish Nifty index futures and options bets as the rupee gained the most in over three years. The Indian currnecy closed at 89.29 against the US dollar on Friday from ₹90.25 on Thursday, thanks to RBI intervention in the currency markets, per NSE, BSE and Bloomberg data.

"Hopes have been drummed up about a trade deal and the rupee strengthening above the 90 to the USD mark," said Rajesh Palviya, head of research at Axis Securities. "This opens the door for upside to 26,200 in the very short term."

The short-covering caused the Nifty and Sensex to rise by over half a percentage point each to 25,966.40 and 84,929.36 on Friday.

Further positive cues were signalled by the Gift Nifty closing up at 26172 , 206 points above the Nifty's Friday closing . The Gift Nifty's rise on Friday signals continued short covering and increased cash buying.

Nifty tracks the Gift Nifty, which trades for over 19 hours, closing at 2.45 am the next session.

FPIs cut their net cumulative bearish bets on index call positions (Nifty and Bank Nifty) from 41,468 contracts on Thursday to turn net buyers of 16,685 index calls on Friday.

They also cut their net long cumulative positions on Nifty put options from 271,232 contracts on Thursday to 223,109 contracts on Friday . On index futures, they trimmed the aggregate net shorts by 48,123 contracts to 223,109 on Friday.

Their cash buying and closing out of bearish derivatives bets indicate bullishness for the markets. When short calls are covered, option sellers expect markets to rise. Similarly, when puts are unwound, buyers expect the indices to rise.

However, market veteran Nilesh Shah, MD of Kotak Mahindra AMC, believes the market expectation of a trade deal had diminished, and instead investors would bank more on earnings.

"The government is going full steam on reforms which aim to give a fillip to domestic consumption by cutting the income tax and GST rates, implementing eighth pay commission from January next year, banning gaming, and with RBI cutting interest rates," Shah explained.

“The government measures are expected to put ₹6 trillion into consumer hands. If they decide to opt for purchasing home-grown goods, that could translate into higher earnings growth."

Shah said he expects mid-cap stocks to outperform large-caps and small-caps to underperform both large and midcaps next year. Returns would tend to veer in the 10-12% range in the coming year.

Options data indicate that Nifty could range between 25850 and 26150 through Tuesday, as per weekly options data .

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