FPIs slash bearish bets ahead of Union budget, set stage for rally

From holding the second-highest cumulative net short positions of 355,379 contracts on 4 June, they held just 24,415 short contracts on 14 June. The highest net shorts they held were 392,756 contracts on 22 March.

Analysts now believe foreign portfolio investors (FPIs) may turn buyers of Nifty and Bank Nifty futures in the run-up to the Union Budget session later this month, sparking an extended rally in both indices.

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FPIs held the second-highest net bearish index futures bets on 4 June, when the Bharatiya Janata Party (BJP) fell short of a majority by 32 seats at 240, against 330 expected by market constituents, in the 2024 Lok Sabha elections.

Stability boosts confidence

However, growing expectations of political stability since then, with the government being headed by Prime Minister Narendra Modi and key portfolios remaining with BJP, have resulted in FPIs squaring off their short positions which act as a hedge to their Indian equity assets worth $797 billion, as per National Securities Depository Ltd.

The short-covering resulted in a large part of the 7% rally from the Nifty's low 21,884 on 4 June to the close of 23,465.60 on Friday. The Bank Nifty jumped 8.15% from a low of 46,077.85 on 4 June to 50,002 on Friday.

The short positions were closed out by FPIs by buying them back at higher levels from retail and high net worth investors, who held a record long index futures positions of 333,364 contracts on 4 June.

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Retail/HNI currently hold 25,083 net long positions. They have been transferring (selling) their longs at a profit to FIIs.

Nifty may test 24,000

In the cash market, FIIs have been net sellers of ₹3064 crore so far this month through 14 June. Mutual funds have net purchased shares worth ₹10814 crore through 12 June as per NSE data, while direct retail investors (not using the MF route) have net purchased shares worth ₹17829 crore.

While this buying helped the rally, analysts believe that it was primarily driven by short-covering since the election results were announced.

"Those (FIIs) not confident of the verdict had built huge shorts to protect their portfolios by 4 June," said Rajesh Palviya, SVP (head derivatives & technical research), Axis Securities.

After the verdict and the formation of the the National Democratic Alliance (NDA) government, they have been squaring off their hedges, which is the prime mover of the rally since 4 June lows. They could even initiate fresh longs which could fuel Nifty toward testing 24,000, Palviya said.

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Agrees Abhilash Pagaria, head of quantitative and alternative research at Nuvama, who expects the Nifty to test 24,000 from its current closing of 23,465.60 on further short-covering by FPIs and the sectoral Bank Nifty to rise from the historic closing high of 50002 to 51250 levels within two weeks.

The NSE offers a cash market segment and derivatives segment in equities. While investors can buy or sell shares in cash, they use the derivatives segment to hedge their cash market positions or to simply punt.