FPIs’ derivatives bets signal profit booking for now
MUMBAI : An important reading pertaining to foreign portfolio investments in index derivatives hit a four-year high on 6 July, shortening the odds of a correction in the near term, as has been seen on previous occasions, analysts said. They were, however, quick to add that any 300-400 points dip on Nifty would be a good buying opportunity.
FPIs’ cumulative net buying on futures contracts based on Nifty and Bank Nifty hit a four-year high of 102,828 on 6 July. This was the highest net purchase since 26 April 2019, when they held 126,827 contracts. Incidentally, FPIs’ net selling on index futures hit a record high of 196,378 contracts on 22 March this year.
That coincided with the Nifty low of 16,829 on 20 March. Rising sentiment on the back of healthy earnings and moderating inflation subsequently resulted in them turning buyers in the Indian stock market after two years of selling ₹1.4 trillion in FY22 and ₹37,632 crore in FY23. The purchase of ₹1.25 trillion so far this fiscal (FY24) has catapulted the Nifty 16% from its March low to a record high of 19,512.20 on 6 July.
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Along with the cash market buying, they raised their bets on Nifty and Bank Nifty (index) futures contracts, which saw their cumulative holdings hit a four-year high. Whenever FPI contract positions hit extremes on either side, markets tend to top or bottom. In the current scenario, the reading at a multi-year high has given rise to cautionary calls by analysts on profit booking. The analysts don’t see a dramatic correction below 19,000 or 18,887.60, the previous record high hit on 1 December 2022.
“The reading normally is a sign of the market topping out, but this time around, unlike in December, FPI cash buying is robust, so I don’t think we’ll see anything more than minor profit-booking,” said Rohit Srivastava, founder of analytics firm IndiaCharts. “This market is a buy-on-dips one, which wasn’t the case in December.”
Just a day before the high on 1 December, the FPI bullish bets hit a high of 102,664 contracts. The market then fell 11% from its high of 18,887.6 on 1 December to 16,828 on 20 March. However, Srivastava added that in the months following December, FPIs sold Indian shares in January ( ₹28,852 crore) and February ( ₹5,294 crore).
“This time, their buying momentum is too strong, and unless we don’t break 19,300, I wouldn’t call this more than mild profit booking,” Srivastava added.
Chandan Taparia, derivatives head at Motilal Oswal Financial Services, advised investors and traders holding leveraged positions to be cautious. He expects the market to get “strong” support closer to 19,000 and 18,887.
“The supports are strong. So, while the current set-up in terms of FPI index longs is similar to that in December, we won’t see the kind of correction that followed after 1 December,” Taparia said, adding that he sees Nifty moving in an 18,887-19,700 range.
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Updated: 08 Jul 2023, 02:20 AM IST
