Mumbai: The exit polls may have predicted a win for the Bharatiya Janata Party in the Gujarat elections but many nervous traders are holding on to their bearish bets ahead of the final outcome on Monday. Analysts said some of these traders are not ruling out a shocker when the actual election results are out, while various others are unsure about the market reaction even if the outcome is favourable for BJP as concerns over the economy such as rising bond yields and possible slippage in fiscal deficit weigh on them.

The exit polls on Thursday projected a win for BJP with 99-135 seats in the 182-seat assembly. Benchmark indices gained as much as 1.2 per cent in Friday’s session following the exit polls. However, the momentum did not sustain and the benchmarks Sensex and Nifty closed off the day’s highs.

Derivative analysts said most of the positions that have been created in the December series are on the short side and most of these remain despite the market cheering the exit poll results on Friday. However, the Street may witness a short covering-led rally if the final election results spring up a surprise in the form of BJP winning more seats than what the exit polls predict. The squaring up of bearish bets could take the Sensex and Nifty up to new highs immediately “Short traders are still holding short positions in anticipation of any reversal on Monday. If the election outcome on Monday is on expected lines as per exit polls, we can witness another leg of short covering,” said Amit Gupta, head of derivatives at ICICIdirect.

The domestic market has seen high volatility in the run up to the election amid fears that the Gujarat polls will turn out to be a close contest between the BJP and the Indian National Congress. A victory for the BJP is seen important for the party maintaining its momentum going into the general election in 2019. The India VIX-which measures market’s perception of volatility in the near term, has swung between a low of 12.16 (December 11) and a 10-month high of 17.39 (December 14). At its highest level of 17.39, the VIX was up over 28 per cent from the closing level of 13.55 on November 30. The VIX closed at 14.94 on Friday.

“Nifty started December series with OI (open interest) of 1.78 crore shares and the OI rose to 2.23 crore shares on December 13th. Short positions were created earlier this month when the market fell and not all shorts are covered yet,” said Chandan Taparia, derivative analyst, Motilal Oswal.

Open interest in the Nifty futures fell 5.7 per cent to 1.97 crore shares on Friday.

Some even expect the Nifty index to touch 10600 or rise 2.5 per cent from current levels if the outcome is higher than what the exit polls have predicted.

Some analysts said the market would see substantial short covering only if the final tally is higher than what the exit polls are predicting.

“Nifty has seen lower-top-lowerbottom formation recently. If the outcome is better than expected, we may see a gap up opening. And in that case, writers of 10500 call option will rush to cover their short positions and we could see further rally to 10600-10650 levels,” said Jay Purohit, technical and derivative analyst at Centrum Broking.

Some believe that the real test of whether the Indian market will be able to sustain its position as one of the most expensively valued Asian market. Besides high bond yields, the focus in the near term will be on public sector banks which will be making a beeline to raise funds through QIP and the HDFC twins which are in the market to raise over $4 billion.

“If oil prices rise further we could see bond yields moving higher and the fund raising by HDFC and HDFC Bank could lead to some pressure on liquidity. People are expecting a ‘Santa rally’ but I don’t believe there is much legs to this rally,” said Sanjiv Bhasin, Executive VP-Market and Corporate Affairs at IIFL.

Going into January, the market will enter pre-Union Budget mode and be guided more by third quarter corporate results.