Shedding election jitters, foreign investors turn big bulls ahead of Budget

Nirmala Sitharaman, in her second successive term as India’s finance minister, will present the federal budget for 2024-25 next month.

Foreign institutional investors, or FIIs, have turnedbullish ahead of the budget not just in the cash segment of Indian equities but also on the derivatives segment.

The Lok Sabha election results earlier this month returned the National Democratic Alliance to power at the Centre, although Modi’s Bharatiya Janata Party fell short of an absolute majority in Parliament. Early jitters over the economics of coalition politics, however, dissipated as Modi took office on 9 June.

In June, foreign investors turned net buyers of stocks worth ₹18,807 crore, after net selling ₹34,257 crore in the preceding two months.

They have also begun theJuly series of derivatives with a net cumulative bullish index futures position—of 319,115 contracts on index futures such as the Nifty and the Bank Nifty on Thursday, at the June expiry series of derivatives contracts.

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FIIs had started the June series with a net bearish position of 297,798 contracts on index futures. These have been covered fully and fresh bullish bets have been created.

“The main concern of FIIs were around the election results," said Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors, an investment management services firm.

“With that concern allayed by political stability and expectation of reform continuity they have turned buyers once again. The budget and corporate earnings will be the next triggers for them."

A month for bulls

The bullishness of FIIs is reflected in the rollover data, which show Nifty futures rolls to the July series at 76%, higher than the three-month average of 69%.

Rollover here refers to traders or investors carrying forward their Nifty futures to the July series; derivatives series normally expire on the last Thursday of each month. Rollovers accompanied by rising markets signal long aggression.

“July has historically been a month for bulls, with Nifty settling in the green 90% of the time over the past 10 years, averaging 3.5% returns," said Abhilash Pagaria, head of Nuvama Alternative and Quantitative Research.

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“We expect this bullish momentum to continue as there are still no signs of exhaustion," he added. “The momentum could lead the Nifty index to touch the 24,500-mark in the next few days, with strong support coming from private banks and IT."

The benchmark Nifty 50 index scaled to a fresh all-time high of 24,124 points on Friday, before ending the day at 24,010.60. The Sensex scaled a new peak of 79,546 points.

Not much exuberance

Pagaria expects that among private bank stocks, HDFC Bank Ltd will gain steam on apossible twofold increase in its weight in the MSCI India index, which is tracked by global passive funds for allocating money to Indian markets.

HDFC Bank ranks fourth by weight (3.93%) on the MSCI India Index, behind Reliance Industries Ltd, ICICI Bank Ltd, and Infosys Ltd.

However, Deepak Shenoy, founder of portfolio manager Capitalmind, said while the markets have performed well an allround “exuberance" that has everyone including small-time investors bullish is absent, thus obviating fears of a possible fall given the recent rally.

The Nifty has gained 6.52% since the end of May, while the Sensex has rallied 6.8% in that period. The last phase of the national election was on 1 June, a Saturday.

Coinciding with this rally, retail and wealthy investors were cumulatively net short index futures by 242,961 contracts on Thursday. This was a hedge against long stock futures contracts, supporting Shenoy’s premise of the markets not being “exuberant".