Fed, SVB closure put market on edge; FPIs brace for fall

After purchasing shares worth ₹13,540 crore in the month through 9 March, foreign portfolio investors (FPIs) net sold a provisional ₹2,061 crore of shares on 10 March, coinciding with US labour market data for February and the SVB fiasco. While US job growth exceeded expectations, wage growth slowed, presenting a mixed bag of data. So far, in 2023, FPIs have sold shares worth ₹20,606 crore.

Apart from cash market sales on Friday, FPIs purchased more index put options on Thursday and Friday, which allowed them to sell the Nifty at pre-agreed prices. Proprietary traders who provide liquidity to the markets simultaneously stepped up sales of index call options, indicating they’re ruling out a market rise this week.

FPIs raised cumulative purchases of index puts by 70,307 contracts to 410,928 contracts over two sessions through Friday. In the same period, prop traders sold a whopping 177,417 more calls, cumulatively taking the total to 251,614 contracts net sold. Put options offset losses to FPIs’ portfolios when markets correct. Call options lose value when markets fall rather than rise, which helps prop traders pocket the premiums the call buyers pay.

FPI and proprietary actions ahead of the weekend underscore caution by two critical constituents in the market, according to Rohit Srivastava, founder, IndiaCharts.

“The turn in the interest rate cycle since March 2022 in the US means that FPIs are currently preferring the safety and yield of the US dollar to the higher risk-return trade-off in emerging markets,” said Salil Pitale, joint managing director & co-chief executive officer, Axis Capital. “In the long term, though, we remain super-bullish on India, given multiplier effects of government’s massive infra spend, rapid digitization of Indian markets and more widespread consuming population.”

Market veterans remain cautious about the near-term outlook, as rising interest rates in the US raise the cost of money, hurt corporate balance sheets, and result in fund outflows from emerging markets to the safety of the dollar. The shock shutdown of Silicon Valley Bank has also spooked global markets and made the Fed’s decision on rate hikes more challenging.

“The US Fed is doing a delicate balancing. If they raise rates, leveraged households, banks and the government will have to carry a heavy burden,” said Nilesh Shah, group president and managing director of Kotak AMC. “If they don’t raise rates, inflation will remain elevated for a longer time. They are raising rates at the fastest pace and withdrawing liquidity at a slower pace, with the hope that inflation will subside with a mild recession.”

“However, we know that ‘running with the hare and hunting with the hound’ isn’t always successful. If the Fed does decide to slow rate hikes and live with higher inflation to support growth, it will benefit emerging market currency and equities. However, whether Fed does that is the million-dollar question,” Shah said.

Kruti Shah, a quant analyst at institutional brokerage Equirus, said a “knee-jerk” reaction couldn’t be ruled out, given the global news flows, but a correction to 17,200-17,000 levels would be a good “entry point” for investors, with Indian bank balance sheets in the “greatest-ever” shape.