FPIs cut bearish bets, but remain wary

Mumbai: Foreign investors’ trading desks have cut their bearish bets on India in the last three days encouraged by the government's tax bonanza to India Inc with a corporate tax rate cut. But, they have stopped short of going the whole hog as per their derivative trade data. This is reflected in the long-short ratio in the index futures, which has spiked to around 43 per cent from 25 per cent on Thursday – the day before the government announced the tax bonanza.

Since the ratio is below 50 per cent, it shows that they are still net short, or bearish. FPIs are said to be bullish when this ratio is above 50 per cent. When the ratio is above 50 per cent it means bullish wagers outnumber short positions.

“They have cut short positions so the ratio is now over 40 per cent. Consistently the ratio was below 30 per cent in the last few series,” said Sneha Seth, derivative analyst at Angel Broking.


In the cash market, they net sold Rs 800 crore worth of shares on Tuesday after buying over Rs 2,700 crore worth of shares in the previous session. Analysts said the selling was part of reverse arbitrage trades as stock futures were trading above their underlying share prices. In a reverse arbitrage trade, traders sell shares and their stock futures contracts at the same time to take advantage of the difference in their values.

India’s move to cut the corporate tax rate to among the lowest in Asia has been viewed favourably by foreign investors as it may help revive economic growth, which had hit a six-year low in the June quarter, and boost profits of Indian companies. The effective corporate tax rate for all domestic companies was lowered to 25.2 per cent from 30 per cent.

“Net FII index futures OI stands at negative Rs 2700 crore on Tuesday compared to negative Rs 10,000 crore on September 19 as FPIs have seen short covering along with long build-up in the index futures,” said Yogesh Radke, head of alternative and quantitative research at Edelweiss. “The recent corporate tax rate cut is a big structural change and we are likely to see follow-up FII flows in equity going ahead.”

Going by the still-below 50 per cent long-short ratio and net sell figure on Tuesday, some in the market said that FPIs have cut their bearish bets but they are in no hurry to bet on further upsides in a big way.

A few are concerned about the impact of the corporate tax rate cut on the fiscal health of India and there are also concerns emerging whether all sectors will see a uniform relief because of the cut.

“On the margin, the tax cuts give them a bit more optimism, but the big risks are still the global slowdown. Tax cuts won’t do much to help with all the external factors that seem to be affecting India and other emerging markets,” said Brian Jacobsen, multi-asset strategist with the multi-asset solutions team at Wells Fargo Asset Management.

“One danger is that the currency could weaken if the fiscal situation deteriorates and if monetary policy stays too accommodative. There are trade-offs with the tax cuts, but... the balance of the trade-offs is to be somewhat positive for the outlook for India’s equity market,” he said.