Nifty discount spooks investors

FIIs have been selling short in derivatives mart partly to hedge long positions in cash segment.

The stock market mood turned bearish on Wednesday as the discount on index futures increased dramatically. The near-month Nifty contract ended the day with a 34 points discount to spot price, nearly double of what it was on Tuesday.

The last time Nifty discount was over 1 per cent was on August 29, 2005. The subsequent day, the index actually gained 40 points.

As stock market valuations get stretched, foreign institutional investors seem to be pressing the panic button, thus triggering a correction, dealers said. FII flows into the cash market seem to have slowed after the Budget, though on a net basis it has been positive.

The spot Nifty today closed at 3116.7 points, while the March Nifty futures closed at a 1.09 per cent discount at 3082.65. The Nifty discount has been consistently rising since last Friday. Dealers said FIIs have been selling short in the derivatives market partly to hedge their long positions in the cash segment.

On Tuesday, FIIs were sellers of Rs 1674 crore in the Nifty Futures segment. But on the cash segment, they made net purchases of Rs 222 crore.

While some investors are betting on a market fall, others are going short to hedge their existing positions in the cash market, dealers said.

Nilesh Inamdar, analyst with Pioneer Invest Corp, said, "FIIs now hold huge positions in the cash markets. They are trying to hedge their position as the markets have seen a huge run-up and this could trigger a correction. Looking at the current market levels, FII actions seem quite justified."

Monal Desai, analyst with I-Securities, said, "During the previous trading session almost all the Asian markets were down except the Indian markets. Investors are now taking a cautious approach as the valuations look outstretched. The FII counter experienced selling and once the technical levels are broken we could see some more selling."

The markets have seen a prolonged bull run in the past few months. The stock prices have seen huge a run-up after the Budget. Market players are concerned about the stretched valuations and are expecting an intermediate correction.