Financial experts forecast an uptick in short positions by overseas investors, anticipating heightened market volatility in the upcoming trading sessions.
FPIs Shift from Bullish to Bearish Stance in Derivatives Market
Foreign portfolio investors (FPIs) have rapidly transitioned from optimistic derivatives positions to pessimistic ones, sparking concerns about a potential substantial market retracement. In just two recent trading sessions, FPIs relinquished ₹20,384.2 crore worth of cash shares, transforming into net sellers of ₹3,852 crore for the month.
Market Movement and FPI Behavior
The National Stock Exchange’s Nifty achieved an all-time high of 22,124.15 points on Tuesday, accompanied by FPIs holding a combined net bullish position of 79,599 contracts in index futures (Nifty and Bank Nifty). Nonetheless, by Thursday, they liquidated all bullish positions and became net short by 4,659 contracts, aligning with the market’s nearly 3% decline to close at 21,462.25, driven by a downturn in HDFC Bank Ltd shares.
A retracement signifies a decline of 5% from the peak, while a correction denotes a slide of 10-20%. When prices fall below 20% from the peak, it constitutes a bear market.
Market Projection and Analyst Insight
Analysts anticipate a rise in foreign investors’ short positions in upcoming sessions, potentially intensifying market volatility. Historical patterns suggest that markets tend to correct and rebound only when they reach extreme short levels. For example, on 2nd November last year, FPIs accumulated net short positions of 175,698 on index futures, coinciding with the Nifty trading at 19,133.25. Subsequently, as they covered the bearish positions, by 21st December, they held a net cumulative long position of 89,782 contracts, aligning with the Nifty’s rise to 21,255. However, the recent shift to negative positions while clients turned positive raises concerns.
Market Trend and Near-term Outlook
While a potential rebound cannot be discounted following the recent sharp decline, the near-term trajectory might lean towards a downward trend if FPIs engage in selling cash and index futures, as cautioned by analysts. This potential scenario may contribute to increased market volatility.
Potential Market Retracement Triggers Caution Among Financial Analysts
The financial landscape is currently brimming with uncertainty as Foreign Portfolio Investors (FPIs) have undergone a notable shift from bullish to bearish positions in the derivatives market. This shift has ignited concerns among market observers about the possibility of a substantial market retracement.
FPIs’ Position Transition
Abhilash Pagaria, the head of quant research at Nuvama Wealth, expressed a cautionary outlook, stating, “There could be still more short creation by FPIs and more downside in store, interspersed by bouts of volatility.” This sentiment hints at the potential for further short positions by FPIs, suggesting a looming period of market instability.
Market Dynamics
The recent meteoric ascent in the Indian markets owed much to substantial investments from domestic and foreign institutional sources. FPIs channeled a staggering ₹1.71 trillion into Indian shares in 2023, complemented by a robust ₹1.85 trillion infusion from domestic institutional investors. Consequently, the one-year forward valuation premium of MSCI India over MSCI China soared to a historic high of 171.26%.
Valuation and Performance Factors
Deven Choksey, managing director of KRChoksey Shares and Securities, pinpointed the precarious position of overvalued segments, stating, “But, with high valuations, there is no tolerance either for corporate governance issues or slip in performance.” Choksey emphasized this by citing instances involving Polycab Cables and HDFC Bank, underscoring the susceptibility of high valuation entities to market upheavals.
Impact on Specific Entities
The fallout from the shift in FPI behavior is palpable in specific entities such as HDFC Bank, which witnessed an 11.5% decline over the past two days. Notably, a sizable build-up of short positions in the active call option contract of the 1,500 level signals impending pressure on the bank in the near term.
Conclusion
FPIs’ swift transition to bearish derivatives positions following a period of bullishness has raised uncertainties about the market’s near-term trajectory. The potential accumulation of short positions by foreign investors could heighten market volatility, impacting the near-term market trend. Analysts remain vigilant amidst this evolving market landscape, keeping a close eye on FPI behavior to anticipate potential market movements.
The deepening skepticism stemming from FPIs’ transition to bearish derivatives positions has cast a shadow of doubt over the market’s immediate trajectory. The swift reversal of market sentiment has triggered a need for vigilance among financial analysts, who are closely monitoring FPI behavior for potential market disruptions and shifts in trading patterns.
