Derivative bets suggest FPIs hold bearish view on market

PALAK SHAH Mumbai | Updated on June 29, 2020

The stock markets seem to have turned euphoric going by the derivatives data, but foreign portfolio investors (FPIs) are bearish and withdrawing from the segment. On the other hand, domestic investors including retail, high net worth individuals and institutions have put all their chips on the table in the derivatives.

Traders use stock and index derivatives to bet on the near-term market trend.

This year, on April 3, domestic investors held just ₹106 crore (around $14 million) worth positions in the stock futures segment out of the total ₹67,148 crore ($8.83 billion) outstanding. The rest 99.5 per cent worth of stock futures bets were held by FPIs. In just three months between April and June so far, all the three widely tracked indices ― Sensex, Nifty and Bank Nifty ― witnessed a 30 per cent rally. During this time, the domestic investor position in stock futures rose by more than ₹12,200 crore ($1.62 billion), which means that they pumped in that much money. The FPI position has risen to ₹82,783 crore, which is just around 23 per cent and in line with the rise in the markets. It shows that FPIs have mostly refrained from pumping new money into stock futures and the rally was propelled by domestic traders, experts say. In fact, in the stock futures segment, FPIs have unwound 1.15 lakh contracts.

“It was a suckers rally, which lacked any interest from smart money. FPIs are sharply unwinding long positions, as they got a chance after the markets bounced. The weaker hands, which are largely domestic retail and wealthy traders, are just taking the FPI burden on their shoulders. This data and the recent rally that have made the bulls euphoric, portend a bleak near-term market outlook,” said Deepak Sawhney, independent data analytics expert, who has mined the FPI data.

Like stock futures, the situation in the index futures segment is the same, where the total outstanding currently is worth ₹15,621 crore ($2.08 billion) and more than doubled since April. In this, ₹7,912 crore ($1.05 billion) is held by FPIs and the rest ₹7,709 crore ($1.02 billion) is held by domestic traders. Data from NSE show that domestic traders are largely long on index futures while the FPIs hold an opposite view. In the month of June, when the Nifty and Bank Nifty indices, two of the largest derivative counters, rose by 15 per cent and 25 per cent respectively, domestic investors kept building longs. During the same time, the FPIs unwound 26.71 lakh long (units of index futures contracts) and shorted 12.57 lakh. Meaning, they started giving up their long bets and turned bearish. But domestic investors went long with 42 lakh index futures, which is the highest in the past six months. Their short positions in the same stood at just 3.13 lakh across indices. Experts say most FPIs are only now coming to terms with the market reality in the backdrop of the Covid-19 infected cases touching the one-crore (10 million) mark, globally.

Published on June 29, 2020

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