The short positions of foreign investors in India’s index futures increased to March 2023 levels last week as they continued to sell in the cash market amid concerns of high valuations and as US President Donald Trump announced 50% tariffs.
According to Bloomberg data, FPIs short positions have remained more than 10 times higher than their long bets since August 8, a level last seen in March 2023. As a percentage of total, short positions have remained above 90% since July 31.
Oversold signals raise hopes of a bounce
Market players said this means that the indices are oversold and may lead to a bounce back. From 2020 onwards, it has been observed that whenever an expiry starts with a very high short percentage of over 85%, it usually brings a bout of short covering in the index leading to a rise in the index in the spot market, said a market participant.
Brijesh Ail, head of technical and derivatives at IDBI Capital also said, technically, the view remains bearish but the long short ratio of 8% defines that the index is in the oversold zone and the market is likely to see the bounce.
But he said this can be more of a trading bounce. The participant explained that since last September, the short covering seen in the index is very timid and it moves the index only by 500-600 points compared to over 1000 points earlier. In addition, FIIs have been very strong sellers, this creates a double effect and their positions in the futures become profitable.
Tariffs, earnings and flows weigh on sentiment
So far in August, FPIs are net sellers of Rs 16748.34 crore. VK Vijayakumar, Chief Investment Strategist, at Geojit Investments said, Trump’s harsh tariffs and the straining of relations between US and India have impacted the market sentiments and, consequently, shorts have piled up pulling the market down. “The tepid earnings growth, elevated valuations and modest projection of 8 to 10% earnings growth for FY26 have emboldened the bears to increase short positions, impacting the market,” he said.
A recent BofA Securities’ latest Asia Fund Manager Survey showed that India is now the least-preferred market, as compared to being the most-preferred one three months back in May. On Thursday, however, Nifty closed the week higher at 24,631 points after six weeks of fall.
A sustained close above 24800 will trigger short covering and this can take the index back to 25200- 25300 levels, Ail said adding that for Bank nifty, which closed at 55,341.85 on Thursday, 55000 remains the make or break level.
If DIIs manage to take the market above 25000, there is a high likelihood of FII short covering happening, said another participant. As of August 14, DIIs have put in Rs 55,794.98 crore into equities this month. Nifty futures contract expiring August 28 is at 24,684.74 points, than expiring September 30 is at 24,822.50 and October 28 is at 24,936.90