Adani crisis makes FPIs double down on bearish bets

As of 10 February, FPIs sold 105,540 index futures on an outstanding basis as part of hedges and speculative bets to protect their portfolios or gain from anticipated market corrections, experts said. This is in addition to the $2.67 billion they’ve sold in cash between 24 January and 9 February.

This shift in investment strategy may also reflect concerns among portfolio investors about the implications of the Adani crisis for the Indian economy.

The number of contracts net sold was the highest since 3 October, when FPIs were net short 127,429 contracts. FPIs hedge their cash portfolios by net selling index futures to insulate their profits from a market correction. At times, some FPIs merely take speculative bets to profit from sudden corrections.

Net selling Nifty and Bank Nifty futures in addition to cash shares implies that FPIs are “abundantly cautious,” said Rajesh Baheti, managing director of Crosseas Capital, one of the country’s largest proprietary traders.

“The Adani crisis caused the market to break below the crucial 18,000 support on which it was perched just before the issue escalated,” Baheti said. “What the FPI stance shows, for now, is that the crisis has overshadowed the positivity generated by the Union Budget as far as they are concerned.”

Since the report’s release on 24 January, the Nifty has fallen from 18,118.30 to 17,856.10 on 10 February.

A day after the Hindenburg report alleging corporate malfeasance against the conglomerate surfaced, FPIs turned net sellers of 23,063 contracts, from being cumulatively net long 23,507 contracts. At the end of 1 February, the day of the Budget, the figure swelled to 85,804 contracts and shortly after, exceeded the 100,000-mark.

The Adani Group has dismissed the allegations as baseless and hired one of the most expensive US law firms, Wachtell, to take on the short-seller.

Last week, global index provider MSCI cut the weighting of some Adani stocks, including index constituent Adani Enterprises, and the Supreme Court called on the Securities and Exchange Board of India to suggest strengthening the investor safety framework.

“Anecdotally, whenever net index futures selling futures tops 100,000, the market tends to bottom out,” said Rohit Srivastava, founder of IndiaCharts. “But, now, the global news flows make it more difficult to predict whether this can happen again and take the Nifty above the breakout level of 18,030.”

He cited the period from 3 October to 1 December 2022 when FPI positions shifted from a net short 127,429 contracts to a net long 96,942 contracts, which saw the Nifty climb 12% to a record high of 18,887.6.

However, some market veterans said that despite the heavy cash and index futures’ selling triggered by the crisis, markets have held up.

“Despite FPIs selling equities worth $4.3 billion so far this year and shorting index futures above 100,000, the benchmark Nifty has fallen just 1.44% between 24 January and 10 February, which shows resilience,” said Nikhil Ranka, senior vice president and portfolio manager for the EDGE fund, Nuvama Asset Management.

Ranka added that given the resilience, if markets stabilized between 17,500 and 18,000 and a heavyweight like Reliance Industries Ltd picked up “traction,” Nifty could test the upper end of the band, which could trigger a wave of “short covering” by FPIs and prop traders who had sold call options on Nifty at 18,000. This could result in a speedy rally to 18,400.