Short circuit: Foreign investors likely to press the sell button this week

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Foreign investors appear to have readied themselves for a negative reaction over this week, after remaining largely absent during the special budget session on Saturday.

The Union budget’s tilt towards consumption over capex, anticipation of an expanding global trade war, and uncertainty over the next monetary policy outcome on 7 February could have influenced their decisions, according to analysts.

In rare move, ahead of the budget, FPIs (foreign portfolio investors) heightened their bearishness by net selling index (Nifty and Bank Nifty) call options, in addition to cash market sales and shorting index futures.

A day earlier, On Friday, they net shorted 94,350 call option contracts on Nifty and Bank Nifty. And on budget day, they increased their aggregate short index call positions to 99,661 contracts, per NSE data.

A seller of call options expects to retain premiums paid by call buyers on the premise of markets falling or moving in a range.

Also read | FPI returns since 4 June all but wiped out

“Selling index calls in addition to being net short index futures and on cash implies a heightened bearish stance ahead of the budget and the monetary policy meeting on Friday,” said Rajesh Palviya, head of derivatives & technical research at Axis Securities. “It’s possible that anticipation of a trade war opening could have partly contributed to their shorting decision.”

He was referring to the executive orders signed Saturday by US President Donald Trump imposing 25% tariffs each on goods imported from Mexico and Canada, and 10% on China.

“FPIs normally go long index calls as a hedge to their short index futures positions,” said Rohit Srivastava, founder of IndiaCharts. “Their going short index calls is very rare and signals excessive bearishness.”

To be sure, FPIs have been consistent net sellers in the cash market since October 2024, having sold shares worth 2.38 trillion through January-end, and hedged their stock portfolios by shorting index futures (Nifty and Bank Nifty) amid rising uncertainty in India and globally.

Also read | FPIs double down on bearish bets ahead of Trump 2.0

Their India selling has been fuelled by lower corporate profitability and concerns over the impact of a global trade war on the rupee and the country’s economic growth prospects.

Outlook for the week

Based on Nifty options expiring Thursday, the market could trade this week in a 1,000-point range of 23,000-24,000, with a downward bias.

FPIs normally go long index calls as a hedge to their short index futures positions.
-Rohit Srivastava

“For this market to turn into a trending one from a trading one, the resistances of 24,400 –24,500 have to be taken out,” said Sahaj Agrawal, head of derivatives research at Kotak Securities. He added that the market would be in a “consolidating, corrective mode” till then. The levels of 24,400-24,500 were ones from where significant selling commenced last month.

Also read | Weak rupee dented dollar returns for already wary foreign investors in 2024

Nifty EPS (earnings per share) has grown only 4.15% from 1,036 in September-end to 1,079 currently, per Bloomberg. The Nifty PE (price-to-earnings) multiple currently stands at 21.29 times.

In contrast, the Nifty EPS grew 16.5% from 822.3 at the end of FY23 to 957.8 at the end of FY24. Over that period, the Nifty PE grew from 20.44 times to 22.88 times, lesser than the earnings expansion.

This indicate that unless earnings pick up significantly, markets will be on a tightrope walk, said Sudhi Joshi, consultant at Khambatta Securities.

 



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