The BSE Sensex nosedived 138 points intra-day but recovered to finally close at 3,973.30 points, registering a net loss of 86.78 points. Local operators were caught on the wrong foot as they rushed to liquidate their long positions on Dalal Street.

The rupee went to an intra-day low of 42.8450 against the dollar with the six-month annualised forward cover quoted at 5.35 per cent (5.15 per cent). Bond prices fell in intra-day trades by 20 paise, but recovered towards close of trade. ``The first half an hour will be crucial on Thursday. The rupee will touch 43 to a dollar on Thursday if the situation on the border worsen,'' Mecklai FinancialServices senior vice-president, KN Dey, said. Opening the day at 42.74/75 from its last close at 42.7450/7550, the rupee weakened to 42.8450 on fears that the air strikes could lead to a retaliatory strikes from Pakistan. By close of trades, the rupee had gained to 42.8250/8350 from its intra-day low.

However, with the Reserve Bank of India sitting pretty on reserves in excess of $33 billion, any speculation in the forex markets is likely to be curbed immediately. In the event of any high degree of volatility in the forex markets, the foreign institutional investors may pull out their investments for a short period and re-enter when the rupee has settled at a lower level. This will give them a larger sum to invest in rupee terms in the Indian markets.

Meanwhile, the minor recovery on the bourses in the last quarter of the trading session was attributed to the investment purchases by FIIs at select index based counters. UTI was also rumoured to have selectively bought few index stocks which enabled theindex maintain the crucial levels of 3,900 points, said brokers.

Maulik Sharedalal, director of Kaji & Maulik Securities expects the weakness to continue for sometime. ``Technical evaluation shows that if the index closes below 3,940 then a deeper correction towards 3,810 also becomes likely.''

``The index has registered a new bottom at the day's low of 3,921. Even in worst conditions the Sensex should not breach 3,888 levels. The long term still looks positive and the index should touch 4,600 levels in the next 7 trading sessions,'' said BSE broker Neel Dalal.

Interestingly, despite the intra-day decline of over 100 points, the undertone of the market continued to remain bullish. According to brokers, the long positions of Rs 200 crore which had been built during the past two sessions had to be liquidated and hence the intra-day downfall. The net long positions on the BSE declined by Rs 96 crore on Wednesday with the short positions valued at Rs 499 crore.

Despite FIIs having sold stocks worth Rs 57crore on Tuesday, market was agog with rumours that they continue to re-rate several front line stocks.

The sharp jump in Reliance from Rs 163 levels to the day's high of Rs 173 was attributed to institutional support. The counter clocked a phenomenal volume of over 2 crore shares between the two leading domestic bourses. However, bull liquidation by domestic operators saw the stock shed 3 per cent of the earlier gains and it finally closed at Rs 163.80. On the GDR front, Reliance was traded at $ 8.75 registering a net decline of 2.23 per cent.

The air-strikes saw the Skindia GDR index dipping by 3.43 per cent to trade at 730.76 points during mid-session. Interestingly, despite the lacklustre phase, GDR of Pentafour Software was traded after a long gestation at $ 25.50, registering a net gain of 4.08 per cent. However, on the domestic front, Pentafour declined by 3.92 per cent to close at Rs 1,152.

``Institutional buying has been selective in nature. The index should stabilise at 3,950 levels howeverfrom here we should see the index drift gradually towards the lower levels of 3,650 points,'' explained Ambareesh Baliga of Kotak Securities.

Among the pharma stocks, Reckitt & Colmann hogged the limelight as FIIs turned bullish at the counter. The stock touched a new 52 week high of Rs 489.90 on the BSE. However the counter continues to witness a net long position of 62,000 shares. Power industry stocks witnessed major sell off with stocks of Tata Power, Tata Hydro and Andhra Valley being frozen on the lower end of the price filter on the BSE.