FPIs turn wary on Indian stocks, become net sellers of futures
MUMBAI : Amid expectations of heightened market turbulence in the wake of India’s surging retail price inflation and slowing merchandise exports, which impacts the rupee, FPIs have turned net sellers of Indian stock futures of a significant quantity in just four days, a rare occurrence, according to market experts, who see this as a move to hedge their profits against a falling market.
From being cumulatively net long 19,130 stock futures contracts on 9 August, they turned net sellers of 83,366 contracts on 14 August, during which period the Nifty shed a percent or 198 points through Monday’s closing of 19435.55.
Selling stock futures acts as a hedge against a fall in the underlying stock price as the loss from its value is offset by the gain made by going short on its derivative contract.
Coupled with shorting stock futures, FPI net inflows into the cash segment of stock markets like NSE and BSE have petered out to ₹737 crore so far this month, according to NSDL, from a four month average inflow of ₹37,309 crore.
“The next two months could see Nifty testing the 18800 mark amid a strengthening dollar, weaker China economy and food supply shocks back home,” said Piyush Garg, CIO, ICICI Securities. Garg expects the Nifty to resume its rally post the correction toward the 20800 mark, but expects some “headwinds” on the way amid assembly elections which kick off in November.
A stronger dollar impacts the profits of FPIs when they repatriate funds back home as they have to first convert rupee to dollar, the base currency. The rupee briefly breached the psychological 83/$ mark on Monday before paring losses to close lower at 82.95. The currency markets will remain closed for holiday on Tuesday-Wednesday, post which the rupee could face pressure on increasing importer demand.
India ran a trade deficit of $20.67 bn in July with merchandise exports narrowing for the six straight month. Adding to the market’s woes were retail price inflation jumping to a 15-month high of 7.44% last month, in excess of a Bloomberg poll which saw it at 6.5%.
Adding potential pressure to India’s burgeoning trade deficit, is China cutting a key lending rate by 15 basis points to 2.5% on Tuesday. This will obviate RBI allowing the rupee to appreciate above 81.5 lest India’s exports turn uncompetitive to China’s, going forward, Garg explained.
“We expect the market to trend sideways with a negative bias in the near term,” said Rajesh Palviya, derivatives head at Axis Securities. “We could be headed to 19200 but sub-19000 levels look unlikely for now.”
A bulwark against heavy FPI selling has been formed by robust domestic inflows into mutual funds, which acts as effective counterparties to FPIs. Monthly investment plans, popularly called SIP, are rising each month. SIPs which stood at just ₹1 trillion in FY2020 surged to ₹1.56 trillion in FY23. In the fiscal year through July they total ₹58,456 crore .
“Balanced advantage fund run by mutual funds is a countercyclical fund , which means when markets are topping, it sells and when they correct sharply it buys, cushioning sharp corrections,” said Nilesh Shah, group president and MD, Kotak AMC.
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Updated: 16 Aug 2023, 12:09 AM IST
