MUMBAI
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Overseas portfolio buyers (FPIs) had amassed a report 153,404 quick contracts on Nifty and Financial institution Nifty futures as of Tuesday, a day earlier than the Reserve Financial institution of India’s Financial Coverage Committee (MPC) begins its three-day assembly (5-7 February). Markets broadly anticipate a 25-basis-point price reduce.
“These shorts are at a report excessive, adjusted for the change in lot dimension of Nifty futures, which passed off on the finish of January for month-to-month spinoff contracts,” mentioned Rohit Srivastava, founding father of analytics agency IndiaCharts.
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The dimensions of those quick positions indicators heightened warning amongst FPIs. Nevertheless, analysts consider a dovish MPC stance beneath new RBI governor Sanjay Malhotra may spark a short-covering rally. This comes amid international uncertainty, significantly issues over potential commerce tariffs beneath a second Donald Trump presidency, which may weigh on riskier rising market property.
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The Securities and Trade Board of India (Sebi) had directed exchanges to extend the lot sizes of Nifty and Sensex spinoff contracts to ₹15-20 lakh from ₹5-10 lakh beginning 1 October 2024, aiming to curb retail hypothesis in index futures and choices.
FPIs primarily use index futures to hedge their inventory portfolios, which stood at a cumulative $786.08 billion as of 15 January, per NSDL information.
“The positions of FPI are excessive, and I believe we are able to at greatest anticipate a aid rally forward or across the MPC assembly consequence and never an enormous quick protecting one the place the higher finish of the vary is 24200 and the decrease finish at 23500,” mentioned Kruti Shah, quant analyst at Equirus Capital.
Shah famous that FPIs are unlikely to cowl or sq. off a good portion of their quick bets, citing uncertainty over Trump’s commerce insurance policies.
“The second we (Nifty) fell from the 25,200-25,500 ranges within the current correction since October, there was an enormous quick build-up by the FPIs,” Shah mentioned. “So they’re deep in-the-money and will not cowl most of their positions until the uncertainty of a worldwide tariff warfare lingers,” she added.
A renewed commerce warfare may gas inflation within the US, limiting the Federal Reserve’s capability to chop charges additional. The Fed final week saved its benchmark price regular at 4.25-4.5%, after reducing it by 100 foundation factors since September.
But, US 10-year bond yields have climbed from 3.7% in mid-September to round 4.5% at the moment, compressing the yield differential between Indian and US 10-year papers from 400 foundation factors to 220 foundation factors. This has triggered $2.4 trillion in FPI outflows from Indian markets since October.
With US bond yields rising, US-led funds have shifted out of rising markets, preferring greenback property. A price reduce by the RBI now may additional weaken the rupee by narrowing the yield differential.
“Uncertainty over Trump tariffs may make the FPIs extra threat averse which is why they’re hedging their portfolios large time right here,” mentioned Sudhir Joshi, marketing consultant at Khambatta Securities.
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Retail and high-net-worth people, home institutional buyers, and proprietary merchants have largely taken the opposite aspect of FPI quick positions.
Earlier than Tuesday, the earlier report quick place stood at 130,919 contracts on March 22, 2023, adopted by 118,460 contracts on 4 June final 12 months, instantly after India’s common election outcomes.
