Cautious FIIs take huge short positions on index futures

Derivatives analysts expect a short-term bounce in benchmark indices given that foreign portfolio investors (FPIs) are heavily short on Nifty and Bank Nifty futures.

FPIs could either cover these or initiate fresh bullish bets if the slew of negative news like trade war fears, monetary tightening, etc, eases, or if there’s no fresh bad news, derivatives experts Hemant Nahata of IIFL and Rajesh Palviya of Axis Securities said.

Based on outstanding positions (cumulative open interest), FPIs’ long-short ratio on index futures was 0.22 on March 28, a six-year low, ETIG Database shows. This reading is also way below the six-year average of 2.64.

“Chances of a bounce rise somewhat when you’re so short, at least in the short term,” Nahata says.

The shorts themselves indicate that FPIs are treading the markets cautiously – either hedging their cash market portfolios or simply punting. Interestingly, their long- short ratio on stock futures was at 1.36 on March 28.

This could mean they’re stock picking in the market or are simply selling some of their cash stocks and initiating long positions on the stocks’ futures so that they don’t miss out in case a of bounce back.