Markets upbeat as FIIs cut bearish bets overnight

Until 25 October, FIIs were 66% short index futures. By the expiration of the October series of derivatives contracts two days later — derivatives contracts expire on the last Thursday of every month — they squared off all their shorts and actually turned 59% long. The next day, 28 October, they remained 57% long and 43% short .

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Their turning bullish comes ahead of the US rate setting committee meeting on 1-2 November where the US Federal Reserve is expected to hike rates by 75 basis points for the fourth time to 4% and also ahead of the Reserve Bank of India’s (RBI’s) meet of its own rate setting committee on 3 November to explain to the government why it failed to contain inflation at the upper threshold of 6% for three straight quarters.

Coinciding with their turning bullish on index futures on 27-28 October, FIIs net purchased shares worth a provisional ₹5,068 crore. In the fiscal year to date, however, FIIs net sold shares worth ₹60,356 crore, NSDL data shows. This follows the ₹1.4 trillion they sold in FY22. The change of stance in index futures and cash market purchases in the past two days have raised the spirits of analysts.

“This is a good sign at least for the short term, given that FIIs were net selling cash and futures before this,” said Rohit Srivastava, founder of IndiaCharts. “It could probably result in more upside for the market.”

“We maintained that the index futures positions by FIIs were hedges to protect their stock holdings. Their having turned bullish recently bodes well for the rally,” said Siddarth Bhamre, research head at Religare Broking.

FIIs hold Indian shares worth an estimated $565 billion. At times of uncertainty, they hedge their portfolios by shorting index futures. These hedges protect their unrealized returns on stocks when markets fall. Any positive cue or anticipation of reduction in uncertainty results in their covering of short positions, which drives any market rally.

On 16 June, they were cumulatively net short index futures by 88%, the most bearish position since the pandemic on 6 March 2020, and a day later, the Nifty hit a 52-week low of 15,183 . From there, their shorts steadily reduced until 28 July when FIIs turned net long. The result of the short covering pushed up Nifty from 15183 on 17 June to 16929 on 28 July. FIIs remained long from then through 18 August during which time the Nifty rose further to 17956.

“Medium to long term, FIIs are bullish India, which is going to remain an outperformer,” said Samir Arora, founder, Helios Capital. “In the short term, though, there is uncertainty stemming from rate hikes and slowdown fears in the US and elsewhere, which could impact Indian markets. Clarity will emerge on these fronts by the end of the year by which time markets globally would have priced in all negatives.”