FPI, retail outflows may extend stock market correction

Benchmark indices Nifty and Sensex fell more than 0.8% each to 19,122.15 and 64,049.06 on Wednesday as foreigners offloaded shares worth a provisional ₹4,236.6 crore and continued selling by retail, offsetting the ₹3,569.36 crore worth of buying by domestic institutions. The decline in the past five sessions has eroded investor wealth by ₹14.45 trillion.

Apart from the cash market sales by foreign portfolio investors (FPIs) and retail direct investors, particularly those engaged in secondary market trading rather than systematic investment plan (SIP) investments through mutual funds, the huge selling of call options shows that investors and traders are bracing for a sharper correction.

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On a marketwide basis, net outstanding calls’ value exceeded that of puts by ₹4.87trillion as of 25 October, a record high. Data for 25 October was not available until press time. That means option sellers have sold that many more calls than puts in the belief that the market could correct more, at least until Thursday’s monthly expiry of futures and options, according to Rohit Srivastava, founder of Strike Money Analytics & IndiaCharts. These include index and stock options.

A call option seller is bearish, while a put option seller is bullish. When the outstanding value of calls is more than puts, it’s a bearish indication.

“Benchmarks like the Nifty and Sensex could correct by 2-3% more while the mid caps and small caps could correct another 8-10% in the near term, which is justified and healthy,” said Samir Arora, founder and fund manager of Helios Capital.

The reason for FPI outflows in September-October is rising bond yields in the US, which encourages them to book profits on riskier emerging market shares to move to the safety of the dollar. On 23 October, the US 10-year bond yields surged past 5% for the first time since 2007. Over the same period, FPIs sold shares worth ₹28,940 crore, including Wednesday’s provisional figure, causing the Nifty to fall 5.4% from its record high of 20,222.45 in mid-September and the Sensex by 5.7% from its life high of 67,927.23 on the same date.

Retail investors who turned buyers of ₹21,900 crore in August and September, after selling ₹21,400 crore in April-July, are also selling, as indicated by the fall in mid-cap and small-cap indices. While their latest investment details will be available only next month, the sharp fall witnessed in the Nifty Midcap and Nifty Smallcap recently points to their selling, too, said Rajesh Palviya, senior vice president (research), Axis Securities.

This is evident if one compares domestic institutional investment (DII) and FPI figures for September-October. While FPIs have cumulatively sold ₹28,940 crore, according to National Securities Depository Ltd (NSDL) and Capitaline, DIIs have purchased shares worth ₹38,913 crore, according to Capitaline. As the DII figure exceeds the FPI one, the inference is that markets have fallen due to cash sales by retail direct more recently, reflected in the Nifty Midcap 150 and Nifty SmallCap 250 shedding 3.3% and 4.25%, respectively, over the past two sessions.

However, given the FPI selling in cash and the massive shorting in call options by traders, some analysts believe any positive news could result in a significant short-covering bounce. “The flip side is that so many shorts—calls over puts sold—means a sliver of positive news could result in massive short covering, resulting in a near-term bounce,” said Kruti Shah, a quant analyst at Equirus. She pegs the Nifty range at 18,900-19,600.

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Updated: 26 Oct 2023, 12:39 AM IST