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Foreign institutional investors (FIIs) have been trimming their long positions on Indian markets over two months, shows an analysis of their derivatives trading.
Since March, the net long position of foreign investors has come down drastically, while they have been gradually building a short stance towards the Indian market. This is the first time in nearly 20 months that FIIs have shifted to a bearish stance on the Indian market, derivative analysts said.
Their long open interest (OI or contracts left unsettled in the futures and options market) of foreign investors has come down from nearly 830,000 contracts due in March to 180,000 at present. During this period, FIIs more than doubled their short OI on Nifty futures from 90,000 to 180,000 contracts. The Nifty futures index is the most widely-traded contract in the country.
“Foreign investors, net-long in index futures till March beginning, have significantly trimmed their Nifty futures' long positions in two months. This is also reflected in the overall weakness we have seen in the market,” said Yogesh Radke, head (quantitative research) at Edelweiss Financial Securities.
The Indian markets have been on a crash course since March. The benchmark Nifty has fallen 10 per cent from nearly 9,000 at the start of March to 8,057.30 on Thursday. Earnings disappointment, weak monsoon forecasts, slow pace of reforms and tax uncertainties on foreign investors are reasons cited by experts. Interestingly, FIIs haven’t been aggressive sellers in the cash market during this time. They've gradually started adopting a more bearish stance as their trading activity in the F&O segment shows, said analysts
The India VIX index, a gauge to assess the underlying risk in the market, has moved up nearly 35 per cent, from 14 to nearly 20. Derivative analysts say FII activity in the F&O points to more weakness. “The market witnessed gyrations in the past few months. Last time, the move towards the lower end was coupled with a rise in perceived risk and increment in the level of protection. This trend is really worrisome. We are not asking our clients to go long as yet, despite the sharp correction. It isn't time to go bottom-fishing as yet, as the market could slip further. Unless there is a sign of material long evidence by participants, one should avoid leveraged longs,” said Bhavin Desai, equity derivatives analyst, Motilal Oswal Securities.
Says Radke of Edelweiss: “The market is expected to remain weak, as it is trading below its 200-DMA (day moving average). On the Nifty, 8,000 will be the key level to watch, as it will be a psychological level. The market will, however, continue to remain volatile. Sentiments are very weak, with the currency putting further pressure and, hence, 8,000 might not hold,” he said.
