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Foreign portfolio investors (FPIs) are yet again caught on the wrong foot. Fear gripped India’s stock market as the Sensex crashed by 1,000 points during the Budget session on Saturday, in alignment with the global scare over coronavirus. But little did the FPIs know that they would still be left holding more than one lakh net shorts in index futures, even as global market sentiments would reverse so soon.
The Sensex and the Nifty have recovered their Budget-day losses in just two trading sessions but huge FPI short positions are yet to be unwound, data show. FPIs are the largest class of investors in India and a contrary bet to their net position in the derivative segment, when the reading reaches an extreme point, often gives the most accurate results.
“The drama has just begun and markets have a long way to move on the upside,” said Rohit Srivastava, chief strategist, founder IndiaCharts.
“FPIs are holding extreme short positions with more than one lakh net short contracts in index futures. But the broad market as represented in the mid-cap indices has started to outperform the Nifty after a gap of two years. The relative strength chart of the Nifty and mid-caps, which represents a breakout from the falling trend, suggests that the worst is over for the markets. The scenario shows Nifty is on strong ground and FPIs on the wrong side. The gains could come fast,” Srivastava said.
Open ‘shorts’ to help rally
Extreme reading of net FPI short positions in derivatives has often been a sure sign of market reversal in the past couple of years. Post Budget the net FPI short position touched nearly 1.1 lakh index futures contracts. The Nifty and the Sensex have gained more than 3 per cent since the Budget and FPIs still hold nearly the same amount of short positions, which indicates their short covering will ensure a sharp rally.
This gets strength from the fact that global markets too are on a recovery path after they crashed on China’s coronavirus news. Major US indices — Dow Jones, Nasdaq, and S&P — all have witnessed more than 3 per cent rally this week so far and the stock market in China too has stabilised.
In the Budget, FPIs got relief in terms of paying dividend distribution tax and also incremental limits in the bond market. Norms allow FPIs to utilise these bonds as collateral in India’s equity market.
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