SGX Nifty open interest falls short to reflect a shift from Indian mkt

Amid uncertainty over the likely impact of General Anti-Avoidance Rules (GAAR) on the participation of foreign institutional investors (FIIs) in Indian market, especially in the derivative segment, it is speculated that FIIs may choose Singapore as the preferred destination to execute their India-centric trade.

Accordingly, it is also contemplated whether the falling open interest in the Nifty futures on National Stock Exchange (NSE) indicates FIIs are relocating their derivatives exposure towards the Nifty futures traded on Singapore Exchange (SGX Nifty).

However, a compilation of the change in the open interest of the SGX Nifty futures in last one month shows that such a shift may not have happened with a thrust, as investors await clarifications on the GAAR and its scope of application. According to the latest data, after touching its highest in a month on the last trading day of the March series, the open interest- an important gauge of trader participation in the derivatives market- in the SGX Nifty futures has again dropped to its usual levels. Currently, the combined open interest in the active futures series on SGX Nifty stands at 25 lakh lots, 30% lower than its value on March 28.

Traders believe that while a few FIIs have indeed swung their index derivatives exposure towards SGX contracts, the pace is not alarming as such. According to Vishal Jain, AVP, equity derivatives at ICICI Securities, the increase in the open interest of SGX Nifty futures has not been proportionate to the decline in that of Nifty futures on NSE.

The open interest in the Nifty futures, which accounts for the larger share of the futures segment, dropped to a more than five year low of 1.93 crore shares on April 10.

Another trader highlights that there are reasons other than GAAR concerns that have led to a drop in FII participation the derivatives segment from an average 37% to 30% in the recent past.

?While GAAR is a prime concern, their worries regarding the macro-environment stressed by high inflation, weakening currency and slowing growth have kept them away from India,? he added.

Notably, last week IMF raised its forecast global GDP growth from 3.3% to 3.5% for 2012. However, it forecasted India?s GDP growth at 6.9% for the year, slightly lower than its January estimates.

According to Reuters, the $1.5-billion Macquarie Asian Alpha Fund cut its India long exposure in March, joining a number of foreign investors reducing their holdings in the country ahead of the expected tax rules (GAAR). The report said that the Asia fund?s India stock short positions dropped from 2.6% in February to nil in March, while the gross exposure, or the sum of its long and short positions, fell to 3.2 % from5.4 %, according to a letter sent to its investors last week.

The finance minister proposed to include GAAR provisions in the 2012 Finance Bill to target deals intended for tax avoidance.

Foreign investors are concerned that that the proposed rule could apply to holders of Participatory Notes, the instrument through which foreign entities not registered in India could invest in the stock markets, issued by FIIs.