Foreign portfolio investors (FPIs) have extended cumulative bear positions on Nifty and Bank Nifty futures to a three-year high of 171,679 contracts, amid global uncertainty prompted by the collapse of three US banks in a week. The positions have been built ahead of a US central bank meeting on interest rates later this week and calls from Western banking regulators to create backstops to prevent transitions from crisis-hit Silvergate Corp, Silicon Valley Bank, Signature Bank, and Swiss lender Credit There is competition. Suisse.
IndiaCharts founder Rohit Srivastava said the last occasion when FPIs initiated such huge short positions was on March 17, 2020, when the pandemic struck.
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At that point, FPIs shorted 173,133 contracts, resulting in the Nifty falling 1,456 points to hit a multi-year low of 7511.1. Sure enough, markets started recovering after that.
This time too, analysts say such a bearish build-up could lead to short-term volatility ahead of the Fed policy decision on Wednesday, in which the US central bank is widely expected to cut rates by 25 basis points (bps) (0.25 per cent). is expected to increase. %) and provide details on emergency measures to prevent financial contagion.
“There is no real domestic trigger, only global news flows behind the FPI actions,” said Rajesh Baheti, managing director, CrossSeas Capital, one of the largest proprietary brokers in the country. And as the Fed highlights the safety of depositors’ money at its mid-week meeting. Until the situation stabilises, volatility will be the order of the day.
Interestingly, Sunil Singhania, founder of Abacus Asset Management, had earlier told Mint that a 25 bps rate hike would be considered a “negative” as prices rallied in markets driven by the collapse of three US tech-focused banks.
FPIs take such futures positions either to hedge their cash market portfolio or to punt on anticipated volatility in the short term.
The bearish futures contract position enables them to offset losses on their portfolio in the event of a market correction. This is because through contracts, they sell the indices of Nifty or Bank Nifty at a predetermined rate.
If the index falls after this, they make a profit because the buyers are bound to buy the index at the higher rate previously contracted. In fact, only the price difference is exchanged as the indices cannot be distributed.
“Such positions offset losses in their cash market portfolios,” Srivastava said.
Between March 10 and March 17 (5 trading sessions) alone, FPIs increased their cumulative bearish bets by 50,792 contracts.
With this, the Nifty fell 1.8% to 17,100, while the Bank Nifty fell 2.2% to 39,598.
Market experts expect further downside pressure on the indices till the US Fed’s rate decision on Wednesday, to which Indian markets are expected to react on Thursday.
“Until clarity emerges on what the Fed is doing to prevent any potential contagion, the pressure will remain high,” said Rajesh Palvia, technical head at Axis Securities.
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