FPI short positions on index futures build up

Mumbai: Foreign fund managers have established a substantial short position in the Indian markets, leading to a significant drop in the long-short ratio in index futures, a metric used to gauge market sentiment.

This ratio has fallen to 18%, close to its eight-month low levels, indicating a bearish sentiment besides potentially introducing challenges for these fund managers in returning the securities borrowed for short sale in the weeks ahead, analysts noted.

Foreign portfolio investors (FPIs) have been sellers not only in the cash segment but have been on the short side in the index futures segment throughout the October series. They rolled over the short positions to the November series and added fresh shorts at the start of the series. By the end of Friday, FPIs were sitting on more than 200,000 short contracts, while they held only 44,000 long contracts in index futures.

Historical trends from the past two years have shown that a significant proportion of short positions frequently lead to an upswing, driven by short covering.

Nevertheless, analysts maintain diverse viewpoints on the current scenario’s possible market repercussions.

“Comparable short positions were observed on March 22, 2023 (92%), September 29, 2022 (87%), and June 16, 2022 (88%),” said Ruchit Jain, lead research analyst at 5Paisa.com. “During these instances, FPIs were compelled to cover their short positions, resulting in the Nifty surging past its previous highs and establishing new record highs.”

Domestic institutions are neutral, with 69,000 longs on index futures as against over 61,000 shorts.”The market has shifted from a distinctly positive to cautiously positive stance recently, and FPIs taking short positions can be seen as hedging in response to the prevailing volatility,” said Sahaj Agarwal, analyst at Kotak Securities. “This doesn’t automatically guarantee a Nifty rally unless we consider factors such as earnings and liquidity.”

Some analysts believe that a recovery could be seen from the current levels.

“The recovery may be slow, but it is still on the cards,” said Chandan Taparia, analyst at Motilal Oswal. “The market could touch 20,000-20,200 levels if the long-short ratio is maintained over the next one or two months.”

According to Jain of 5Paisa, Indian markets have been reacting to the global news flows of late and thus, the global market’s momentum along with FPIs’ positioning is likely to drive the near-term trend. “In case of such short covering move, the Nifty could rally towards its resistances, which are seen around 19,370 followed by 19,450 and 19,700, while immediate support is placed in the 19,000-18,950 zone,” he said.



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