FPIs’ net long positions raise red flag for the market

If the trading activity of foreign portfolio investors (FPIs) in the derivatives segment is any gauge for the near-term stock market direction, then the bets are yet again reaching feverish pitch.

Data show that as on last Friday, FPI net long position in the index futures segment, consisting of Nifty and Bank Nifty, stood at 91,355 contracts.

Experts see in this a sign of market volatility in the near term. In the past three years, there have been only three instances when the FPI net long position in the index futures segment had crossed 1 lakh contracts.

Positions worth more than ₹20,000 crore are currently outstanding in the Nifty and Bank Nifty futures segment. Of this, roughly over 70 per cent of the position is that of the FPIs.

“The net long position of FPIs in the index futures segment nearing 1 lakh contracts is a sign that stock markets could see heightened volatility in the coming weeks. Possibility of a sudden major crash, like we saw in March is not there, but a correction in the pace of the ongoing market rally could be in the offing,” said Rohit Srivastava, chief strategist, IndiaCharts.

Domestic clients

On the other side, domestic clients are holding net short positions in the index futures segment. These stood at over 42,000 contracts.

When the net long positions reach a peak level in derivatives, it means that more traders are likely to sell on every rise in the index and, hence, the near term upside moves could be capped.

The Nifty index has witnessed a rally of 73 per cent or 5,500 points to reach the 13,000 mark in less than nine months since the Covid-induced market crash.

During the same time, the Bank Nifty index rallied over 74 per cent or 12,600 points to reach 29,600 levels. It is one of the longest rallies of both the indices in the shortest time in more than a decade, experts say.

In the stock futures segment, the total open interest stood at around ₹1,12,399 crore. It had fallen to around ₹67,000 crore post the March market crash.

Stock futures

Domestic traders held stock futures worth ₹82,786 crore in January 2018, their life-time high holding. This was at the peak of a small/mid-cap rally. Then, the FPIs held stock futures worth ₹74,988 crore.

In January 2020, when the Nifty was above 12,000, the stock futures position of domestic traders was in the region of ₹25,000-30,000 crore. The same for FPIs stood at over ₹1,05,000 crore.