Betting Against Modi Wave? How Stock Market Bears Burnt Their Fingers

India's stock market bears were riding high on the anticipation that the "Modi wave" (ascribed to Prime Minister Narendra Modi's popularity among the masses) was ending after Indian National Congress party scion Rahul Gandhi held a year-long Bharat Jodo Yatra (a walkathon), where he was seen walking in rallies across states, mainly alongside with left-leaning celebrities. But the bearish bets on Indian markets ahead of the four state elections turned into yet another debacle for the FPIs since they had to yet again rush to cover their shorts, data shows.

This was the third time this year that the FPIs had mounted huge short positions in India's index futures segment, the earlier two occasions being in January when the Hindenburg report was published against the Adani Group and later in August ahead of the publication of the negative report by Organised Crime and Corruption Reporting Project (OCCRP) against the Adani Group on the lines of the Hindenburg report. While the markets declined somewhat after the Hindenburg report, the anticipated magnitude of fall (based on huge short built-up) in the benchmark indices Nifty, Sensex and Bank Nifty did not happen in August.

On 2 November, the FPI bearish bets touched 1.75 lakh contracts in the index futures segment ahead of elections in Rajasthan, Madhya Pradesh, Chhattisgarh and Telangana. It was this year's second biggest short built-up by FPIs after the 196,000 index futures short witnessed in March when the Supreme Court of India (SC) had set up a committee to oversee the probe into Hindenburg allegations against the Adani Group. Then, FPIs were forced to cover their short bets as Adani Group managed to raise funds from Australian billionaire Rajiv Jain of GQG Partners and downgrade reports stopped.

This time the short covering of FPIs mainly started during the last week of November, after the final hearing in the SC, where market regulator SEBI did not bring any charge against the Adani Group and the Chief Justice of India raised doubts over the credibility of Hindenburg Research. But an impetus to the FPI short covering that pushed them into a mad rush came to post the election verdict of December three, where PM Modi's BJP secured a comfortable majority in three out of four states. The results surprised even the most ardent political Pundits since it affirmed that PM Modi and his ruling party were poised to win their third term in the 2024 national elections with a roaring majority.

On 7 December, data showed that FPIs held net long positions of around 23,000 contracts in the index futures segment in India. From the start of November, as the FPI short positions kept rising, India's key benchmark equity indices Sensex, Nifty and Bank Nifty kept climbing on the back of domestic buying. The Nifty index has gained more than 1000 points or closer to five per cent after the SC verdict on Adani group.

"A meaningful short covering of the FPI bearish bets came after the state election results were declared on 3 December. Prior to that even though the FPIs held the second highest berish bet on record after March 2023, they were reluctant to cover their shorts," said Rohit Srivastava, founder, Strike Money Analytics and Indiacharts.

But Srivastava is of the view that any further or significant rise in the FPI net long positions could mean that the markets were poised for a downward correction. Data from Strike Money Analytics also shows that India's small and mid-cap indices have risen by 23 consecutive sessions over the past month.

Adani Stocks on Fire

Since businessman Gautam Adani, the founder of Adani Group, comes from the same state as PM Modi i.e. Gujarat, both are perceived to be close also mainly due to Adani's penchant for big infrastructure projects in the country and the ease of getting them. Allegations by US based Hindenburg Research, a self-acclaimed short seller, had halted the unprecedented rally of eight of the group's listed companies that had made Gautam the richest in the world. However, Gautam Adani fell way below India's Mukesh Ambani after the Hindenburg report. 

But the Adani Group shares have gained between 15 to 25 per cent since the last SC hearing and BJP's election victory in three states. After the BJP's state election victory, a U.S. government entity also cast doubts on the Hindenburg Report against the Adani group, which strategic affairs experts believe was the way of the Joe Biden government to show solidarity with the ruling dispensation since it put the lid over recent controversies and disapproval over the narrative of the main opposition Congress party, dominated by the Gandhi family.

Despite this, experts are advising caution in the markets since the indices and most stock prices are at their peak valuations.

Palak Shah

BW Reporters The writer is author of the book: The Market Mafia - Chronicle of India’s High-Tech Stock Market Scandal & The Cabal That Went Scot-Free. Palak has been a journalist in Mumbai for nearly two decades now. He has worked for most premier pink papers including The Economic Times, Business Standard and The Financial Express and The Hindu Business Line. He was drawn to crime reporting at the age of 19 but a few years in the field told him that the fabric of crime had changed and the organised gangs, as Mumbai had witnessed during the eighties, no longer existed. It was business and markets that dominated the scenario. His passion to unravel the intricacies of the ‘white money’ economy led Palak to the world of finance and regulations.