MUMBAI: Foreign Institutional Investors (FIIs) have drastically flattened their cumulative bearish bets on index futures, Nifty and Bank Nifty contracts and have turned bullish in the past two days, sparking hopes among technical and derivatives analysts that this could give more strength on the 6% rally that started at the end of September, at least in the short term.
Until October 25, FIIs were 66% short index futures. When the October string of derivative contracts expired two days later — derivative contracts expire on the last Thursday of each month — they flattened all of their short positions, effectively going 59% long. The next day, October 28, they stayed 57% long and 43% short.
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Reason for hope
Their upward trend comes ahead of the US rate-setting committee meeting on November 1-2, where the US Federal Reserve is expected to raise interest rates for the fourth time by 75 basis points to 4% and Also for the Reserve Bank of Indias (RBIs), its own rate-setting committee met on Nov. 3 to explain to the government why it failed to keep inflation below the 6% cap for three quarters in a row.
Coinciding with their upward trend for index futures on October 27-28, FII’s bought net shares worth a preliminary ₹5,068 crore. However, in the fiscal year so far, FIIs sold net shares worth 60,356 crore, NSDL data shows. This follows the ₹1.4 trillion they sold in FY22. The movement in index futures and money market purchases over the past two days has excited analysts.
“In any case, this is a good sign for the short term, as FIIs sold net cash and futures before this,” said Rohit Srivastava, founder of IndiaCharts. “It could probably lead to more profit for the market.”
“We claimed that FII’s index futures positions were hedges to protect their equity holdings. That they have recently turned bullish bodes well for the rally,” said Siddarth Bhamre, head of research at Religare Broking.
FIIs hold Indian stocks worth an estimated $565 billion. In times of uncertainty, they hedge their portfolios by shorting index futures. These hedges protect their unrealized returns on equities when the markets fall. Any positive cue or anticipation of a reduction in uncertainty results in the hedging of short positions, fueling any market rally.
On June 16, they were cumulative net short index futures at 88%, the most bearish position since the March 6, 2020 pandemic, and a day later, the Nifty hit a 52-week low of 15,183. From there, their shorts steadily narrowed until July 28, when FIIs became net long. The short cover result pushed Nifty up from 15183 on June 17 to 16929 on July 28. FIIs stayed long from then until August 18, during which time the Nifty rose further to 17956.
“Mid to long term, FIIs are bullish India, which will continue to be an outperformer,” said Samir Arora, founder of Helios Capital. “However, in the near term there is uncertainty due to interest rate hikes and fears of slowing down in the US and elsewhere, which could affect Indian markets. Clarity on these fronts will emerge towards the end of the year, by the time markets worldwide would have priced in all the negatives.”
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