MUMBAI
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International portfolio buyers (FPIs) had amassed a document 153,404 brief contracts on Nifty and Financial institution Nifty futures as of Tuesday, a day earlier than the Reserve Financial institution of India’s Financial Coverage Committee (MPC) begins its three-day assembly (5-7 February). Markets broadly anticipate a 25-basis-point fee lower.
“These shorts are at a document excessive, adjusted for the change in lot dimension of Nifty futures, which occurred on the finish of January for month-to-month spinoff contracts,” mentioned Rohit Srivastava, founding father of analytics agency IndiaCharts.
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The scale of those brief positions alerts heightened warning amongst FPIs. Nevertheless, analysts consider a dovish MPC stance underneath new RBI governor Sanjay Malhotra might spark a short-covering rally. This comes amid international uncertainty, significantly issues over potential commerce tariffs underneath a second Donald Trump presidency, which might weigh on riskier rising market property.
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The Securities and Trade Board of India (Sebi) had directed exchanges to extend the lot sizes of Nifty and Sensex spinoff contracts to ₹15-20 lakh from ₹5-10 lakh beginning 1 October 2024, aiming to curb retail hypothesis in index futures and choices.
FPIs primarily use index futures to hedge their inventory portfolios, which stood at a cumulative $786.08 billion as of 15 January, per NSDL knowledge.
“The positions of FPI are excessive, and I feel we will at finest anticipate a reduction rally forward or across the MPC assembly consequence and never an enormous brief protecting one the place the higher finish of the vary is 24200 and the decrease finish at 23500,” mentioned Kruti Shah, quant analyst at Equirus Capital.
Shah famous that FPIs are unlikely to cowl or sq. off a good portion of their brief bets, citing uncertainty over Trump’s commerce insurance policies.
“The second we (Nifty) fell from the 25,200-25,500 ranges within the latest correction since October, there was an enormous brief build-up by the FPIs,” Shah mentioned. “So they’re deep in-the-money and will not cowl most of their positions until the uncertainty of a worldwide tariff battle lingers,” she added.
A renewed commerce battle might gasoline inflation within the US, limiting the Federal Reserve’s capacity to chop charges additional. The Fed final week saved its benchmark fee regular at 4.25-4.5%, after chopping it by 100 foundation factors since September.
But, US 10-year bond yields have climbed from 3.7% in mid-September to round 4.5% at present, compressing the yield differential between Indian and US 10-year papers from 400 foundation factors to 220 foundation factors. This has triggered $2.4 trillion in FPI outflows from Indian markets since October.
With US bond yields rising, US-led funds have shifted out of rising markets, preferring greenback property. A fee lower by the RBI now might additional weaken the rupee by narrowing the yield differential.
“Uncertainty over Trump tariffs might make the FPIs extra danger averse which is why they’re hedging their portfolios massive time right here,” mentioned Sudhir Joshi, marketing consultant at Khambatta Securities.
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Retail and high-net-worth people, home institutional buyers, and proprietary merchants have largely taken the opposite facet of FPI brief positions.
Earlier than Tuesday, the earlier document brief place stood at 130,919 contracts on March 22, 2023, adopted by 118,460 contracts on 4 June final yr, instantly after India’s normal election outcomes.
