Indian equities rallied sharply on Thursday, with benchmark indices Sensex and Nifty 50 jumping over 1% each to extend gains for a Indian equities rallied sharply on Thursday, with benchmark indices Sensex and Nifty 50 jumping over 1% each to extend gains for a second consecutive session despite persistent global and domestic headwinds.Sensex gained nearly 790 points to close at 75,399, while Nifty50 rose around 277 points to end the session near 23,690. The rally added around Rs 5 lakh crore to the combined market capitalisation of all BSE-listed companies, taking the total valuation close to rise above Rs 463 lakh crore.Bharti Airtel shares were the top gainers on Sensex, jumping nearly 6%. Zomato-parent Eternal, HDFC Bank, Adani Ports, M&M, Sun Pharma, Bajaj Finance, NTPC and Kotak Mahindra Bank followed, rising 1-3%. Bucking the trend, IT stocks including Infosys, Tech Mahindra, HCLTech and TCS declined up to 2.5%India VIX, which measures volatility in markets, dropped more than 4% to 18.61 amid the renewed optimism. In the broader markets, the Nifty Midcap 100 index gained more than 1% but the Nifty Smallcap 100 index underperformed, closing in the red with marginal losses.Sectorally, Nifty Metal and Nifty Pharma jumped nearly 2% and 3% respectively to lead gains. Nifty IT, however, tumbled around 2% amid renewed AI worries. Around 1,725 stocks advanced on NSE, while 1,540 declined and 105 remained unchanged.Here are the key factors that may be supporting the bulls on Dalal Street:1) India weighs tax cut on foreign bond investmentsThe Indian government is considering a proposal to significantly reduce taxes paid by foreign investors on the nation’s bonds in order to attract inflows by aligning policies with global norms, Bloomberg reported citing people familiar with the matter. The Reserve Bank of India (RBI) recommended the move, which is now being seriously considered by the Finance Ministry, the report added.After the release of the report, the rupee recovered some of its losses and Indian bonds gained, pushing the 10-year benchmark bond yield down by 2 bps to 7.03%. The possibility of the move attracting FII inflows after the persistent selloff may have boosted market sentiment.2) Strong earnings seasonSeveral heavyweight companies have reported strong Q4 earnings this season, with Morgan Stanley highlighting that earnings growth is turning after a six-quarter mid-cycle slowdown. It added that the earnings growth is likely to accelerate further, driven by RBI and government’s reflationary policies via rate cuts, bank deregulation and liquidity infusion, strong capex trends in energy, defence, semiconductors, fertilizers and data centres among others, large tax cuts and relatively stimulating fiscal. Notably, Morgan Stanley maintained its ‘Overweight’ call on today’s Sensex top gainer Bharti Airtel, seeing a 37% upside potential even after the telecom major reported a 34% YoY decline in consolidated net profit to Rs 7,325 crore for the March quarter.3) All eyes on US-China meetingUS President Donald Trump arrived in China to meet Chinese President Xi Jinping after years of escalating geopolitical friction between the world’s two largest economies. Trump and Jinping agreed the Strait of Hormuz should remain a free waterway and Iran shouldn’t be able to exact payments for use of shipping lanes, according to the White House. China also “expressed an interest” in increasing its US oil purchases to reduce its “dependence” on oil traveling through the strait, according to the White House summary.“This is an important meeting. This is the first time that an American president has set foot in China in nine years since Trump started the trade war back in 2017-2018, and the whole world, India, the United States, Europe, and Africa, we have all suffered from the geopolitical split and tension between the US and China,” said Shaun Rein, market strategist from China Market Research Group.4) Global markets in greenGlobal markets mostly remained in the green, with South Korea’s Kospi gaining nearly 2%. Hong Kong’s Hang Seng recorded mild losses. Japan’s Nikkei and China’s Shanghai Composite, however, slipped into the deep red.European markets had closed in the green yesterday, and continued to record gains on Thursday, with France’s CAC, UK’s FTSE and Germany’s DAX rising up to 1%. Wall Street indices also closed in the deep green, with tech-heavy Nasdaq gaining more than 1%.5) Bond yields declineUS Treasury yields fell slightly. The yield on benchmark US 10-year notes fell to 4.455% while the 30-year bond yield declined to 5.027%. The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell to 3.965%. Falling bond yields typically make bonds less attractive to investors, which in turn can lead to some uptrend in markets.Why is some caution warranted?Despite the optimism, some caution is warranted. Rupee hit a fresh all-time low, breaching 95.95 against the US dollar for the first time ever and eclipsing its previous record low of 95.7950 hit on Wednesday. The currency closed at 95.7625, down marginally from ‌its previous close, as it erased some losses after the Bloomberg report.The sharp weakness in rupee came as oil prices continued to remain elevated above $100 per barrel level amid the prolonged blockade over the Strait of Hormuz, a narrow 33-kilometre waterway connecting the Persian Gulf with the Gulf of Oman that handles over 20% of the world’s daily oil and gas shipments.Foreign institutional investors (FIIs) continued to remain net sellers of Indian equities, offloading shares worth Rs 4,703 crore on Dalal Street on Wednesday, according to NSE data. This marked the seventh consecutive session of selling by foreign investors. While this does not reflect their activity on Wednesday, persistent FII selling continues to weigh on sentiment.Continuous rupee depreciation is becoming a major macro threat for the economy, according to VK Vijayakumar, Chief Investment Strategist at Geojit Investments. He highlighted that this year began with the rupee at 90 to the dollar. Since then it has steadily depreciated to the present level of 95.70 to the dollar. If crude remains elevated for an extended period, the rupee will move to 100, he said.“The other major drag on the rupee is the sustained selling by FPIs in the Indian market. Money is moving into markets like the US, Japan, South Korea, and Taiwan which are doing very well. So long as the outperformance of these markets and the underperformance of India continues, FPIs will continue to sell, which, in turn, will further drag the rupee down,” the analyst further said, adding that the situation will change only if the Strait of Hormuz is opened and crude price falls or the AI trade which is attracting FPI flows into the AI leaders ends, although there is no clarity on when this will happen.“Sustained depreciation of the rupee has negative implications for the market. Imported inflation will rise. Margins of companies with petroleum-based inputs will be impacted. Exporters will benefit. Pharmaceuticals will be a safe bet since the demand for pharmaceuticals is inelastic and this export sector will benefit from rupee depreciation. Textiles will also benefit. IT, though a potential gainer, will continue to be on the back foot due to the Anthropic shock,” he said.(With inputs from agencies)(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. These do not represent the views of The Economic Times)