Nifty May Rally More As FPIs Hold Largest Bearish Bets Post Adani-Hindenburg Crisis
Foreign portfolio investors (FPIs) are holding the largest bearish bet in the Indian markets since March 2023, the time when the Adani Group's woes were at its peak, post the negative report by US-based short seller Hindenburg Research.
The amount of FPI short positions as of Thursday's market closing is nearly similar to the short build-up witnessed by markets at the beginning of the lockdown in March 2020. Then, since the sentiment was extremely bearish due to an unprecedented health crisis, the markets were expected to fall. But they witnessed a sharp rally instead as FPIs rushed to cover their short positions. Analysts are expecting something similar around the derivative expiry at the end of this month.
Data shows that as on Thursday's market closing, the FPI short position in India's index futures segment stood at 1.75 lakh contracts, which in monetary terms could be way higher than $1 billion.
On Wednesday, after the US Federal Reserve kept key interest rates steady, ensuing a rally in the global stock markets, the FPIs in India actually raised their bearish bets by nearly 12 per cent from 1.57 lakh contracts short index futures. It is one of the key reasons for India's market to witness a slow up-move compared to the other US and European markets, after the Fed's rate decision, analysts say.
Interestingly, the FPI short position in India as on Thursday is the second highest short built-up ever after 1.76 lakh contracts in March 2020 at the beginning of Covid lockdown and 1.96 lakh contracts seen in March 2023 during the Adani Group crisis, data provided by Strike Money Analytics shows.
After the US Fed decided to hold interest rates steady at around 5 percent, most global stock markets rallied more than 2 percent. But benchmark equity indices in India, a day after the closing of the Fed meeting, have been hovering around 0.6 percent gains.
FPI Short Build-up
What do the huge FPI short positions mean for Indian markets?
"In the near term, such extreme bearish bets by the FPIs could indicate a lower risk of a downside for India's stock markets. Instead, a sharp rally on the back of short covering by FPIs is in the offing. The Nifty index can bounce back to 19,450 levels, a scenario which seems highly possible. The index may even attempt to cross 19,690 levels if the short covering by FPIs is intense," says Rohit Srivastava, founder Strike Money Analytics and IndiaCharts.
Srivastava is of the view that Indian stock markets are in an oversold zone as of now since the Fed policy outcome has not been negative. On Wednesday, US Fed chief Jerom Powell did not raise interest rates and it is expected that the Fed will hold steady at the current levels. In the US too, there is a huge build-up of short positions, Srivastava said. The US benchmark indices Dow Jone, S&P and Nasdaq have rallied by nearly 3 percent this week.
From the peak the Nifty and Sensex are down nearly 5 percent in the last two months as FPIs turned net sellers. Exchange data shows that FPIs sold stocks worth Rs 76,368 (approximately $9.2 Billion) in the cash markets in India in three months between August and October. In the current month the net FPI selling stood at Rs 3052 crores.
In contrast to the FPI short positions, domestic investors comprising retail and propriety traders hold net long positions to the tune of 1.46 lakh contracts. On a net basis, i.e. the total net short positions in the markets translate to around 29,000 net short in index futures currently.
