Last week, the Sensex and Nifty fell around 4.5% each, marking their biggest weekly losses since June 2022. Foreign portfolio investors (FPIs) net sold shares worth ₹9,897 crore on Friday, taking their sales tally for the past four trading sessions to ₹37,000 crore – their highest selling in a week. They pumped ₹35,575 crore into India in September.
The long-short ratio of foreign investors’ Nifty futures positions shows room for more downside.
“Because of the ongoing geopolitical tensions between Israel and Iran, foreign investors have cut down the long positions. Hence, there has been a buildup of short positions which could lead to a further slide of around 5% in the Nifty,” said Rajesh Palviya, senior vice president of research-technical and derivatives at Axis Securities.
Traders and analysts often consider foreigners’ long-short ratio of Nifty futures an indicator of oversold and overbought conditions.
“At the start of the October series, the FPIs had long-heavy positions of about 81% which has historically been cautionary indicating that markets are likely to make short-term highs,” said Ruchit Jain, lead research analyst at 5Paisa.
To be sure, the current ratio of 58% is not an extreme reading, which is why analysts see the likelihood of further declines. The reading was 12.4% on February 28, 2020, when concerns over the spread of Covid had erupted.
“The lowest long-short ratio of FPIs’ Nifty futures positions was in March 2023 at around 7.8% and the highest ever was at 92.6% in 2014,” said Jay Vora, senior market analyst at indiacharts.com
In the past few years, historical trends have indicated that a substantial build-up of short positions often precedes a market upswing, influenced by short covering.
“Foreign investors are selling in the cash market while unwinding long positions and building short positions in the derivatives market leading to bearishness,” said Jain. “Until the FPI selling subsides, there is no significant upside in the markets.”
The aggressive selling by overseas funds in India is partly due to the rebound in Chinese equities in the past fortnight after the government’s stimulus packages aimed at revitalising its economy.
“The valuation gap between Chinese and Indian markets is in favour of China which could result in foreign investors pumping money into China in the near term,” said Jain.
Analysts said the biggest creation of bearish bets by FPIs is in rate-sensitive sectors such as banks and auto. “There is a significant build-up of short positions in the banking sector along with auto which could be the first leg of profit booking in auto,” said Palviya.
“Overseas investors are, however, long on pharma and metals and are likely to continue these long positions.”
Palviya said that JSW Steel, Sun Pharmaceuticals and Lupin Pharma were some stocks with long position build-up.
In the past week, the Bank Nifty and Nifty Financial Services Index were down 4.41% and 5.2%, respectively, while the Nifty Auto Index slumped 6.10%. Nifty Metals Index moved 0.48% higher while Nifty Pharma shed 1.8% in the same period.
(You can now subscribe to our ETMarkets WhatsApp channel)
