FPIs more bearish on equities than during first Covid jolt

Mumbai: Foreign fund managers are most bearish on Indian equities in two years since the Covid-19-led rout as concerns over rising interest rates in the US, a weakening rupee and a global slowdown fuel risk-off sentiment.

The long-short ratio in index futures - a measure of the number of bullish positions versus bearish ones - of overseas investors stood at 12% on Monday, the lowest in over two years. A low reading means foreign investors are bearish. The previous low was 12.4% on February 28, 2020, when concerns over the spread of Covid had erupted.

The ratio shows FPIs are heavily bearish in the market at 88%, and long positions are 12%. Some analysts said extreme readings in the ratio could be an indicator of a short-term bounceback.

"A falling ratio clearly speaks about the negative market setup, but at the same time, a much lower ratio also indicates extreme pessimism, which could turn into short covering if any small positive trigger happens from the global or domestic market," said Chandan Taparia, technical analyst at Motilal Oswal Financial Services. "The outlook remains bearish, but too much negativity in the ratio can be treated as an oversold scenario. So, positions need to be light accordingly though the market view is negative."

Foreign portfolio investors (FPIs) have been consistently selling Indian equities for the last nine months. Their sales since October 1, 2021, have touched ₹2.2 lakh crore. FPIs have sold about ₹1.9 lakh crore worth of Indian stocks so far this calendar year.

Siddarth Bhamre, head of research at Religare Broking said FPIs' long-short ratio clearly states that their short-term bias is largely negative, but in the past, the market has bounced back in the short term in such situations.

When the ratio dropped to 16.9% on May 12, the market had bounced back soon. Within two weeks, the Nifty index jumped 850 points or 5.5%, from 15,808 to 16,661 on May 30, 2022. Since then, the market has corrected 929 points or 5.6%, to close at 15,732 on Tuesday.

FPIs have reduced nearly 17,000 long contracts (bullish positions) in index futures on Monday while increasing shorts (bearish positions) by 34,000 contracts.

"Generally, the low reading signifies support for the market and a bounce back from important support levels," said Rajesh Palviya, head of technical and derivatives at Axis Securities. "However, this time markets not holding important support levels indicate a probable further slide down ahead of Fed meet outcome and concerns over global inflation amid ongoing geopolitical tensions."

Nifty has broken its May low of 15,735 and made a new low near 15,650 zones, while the Bank Nifty is still holding to the May low support of 33,000 zones.

"The market is at the crucial support zone of around 15,700-15,600 levels," said Nagaraj Shetti, technical analyst, HDFC Securities. "But, the inability of bulls to show any significant upside recovery from the important support indicates chances of one more leg down to 15,600-15,500 levels before showing any significant upside bounce from the lows."