Foreign institutional investors’ activity in the derivatives segment has hit a five-year low, reflecting their displeasure at the Union Budget proposal on General Anti-Avoidance (tax) Rules (GAAR). Derivatives markets witnessed strong deleveraging, with FIIs’ open interest (OI) dropping to 43 per cent.
Also, their open positions-interest in Nifty futures has fallen to a seven-year low. The open interest of 22.47 million shares in Nifty futures as on April 9 was a 16-month low. Only twice in the past five years (on December 31, 2010, when OI was at 22.46 million shares and on July 29, 2011, when OI was at 22.18 million shares, was it lower.
After the finance minister presented the budget, the GAAR provisions have created confusion on unwinding of positions by FIIs, as there was no claritywhether investment routed through regions such as Mauritius could be taxed.
As new rules were to take effect from April, they started selling holdings in their names, as well as those held by Participatory Note holders. The situation may remain so till the budget proposals becomes law and the rules are notified, expected in mid-May.
This selling has resulted in deleveraging of their positions to the level of February 2007. FIIs’ open interest, which indicates their leveraged positions, has started falling and for the first time in five years to below 50; it is presently at 43. Usually their OI positions get rolled over month on month or they build fresh positions soon after expiry.
Normally, in the initial days after expiry, their positions were in the range of 60-90 per cent, compared to the level prior to expiry. Over a third of volumes in the Nifty futures usually come from these FIIs.
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“While selling by FIIs due to tax uncertainties is over as from April, new tax rules will apply to them, which are yet to be notified,”said Yogesh Radke, head of quantitative institutional research with Edelweiss. He said in the past, whenever OI fell to very low levels, the market had seen recovery because the fall was sentiment-driven and lower leverage helped bulls. This time, however, the lower OI is due to regulatory reasons.
This time, there are some triggers for the market to move up. For example, the 50-day moving average is still above the 200-day moving average (5,150), which can act as strong support. also, says Vibhav Kapoor, group chief investment officer, IL&FS, “The market sees a strong possibility of a 25-basis points cut in interest rate.” These could be triggers for the market to move up.