FPIs mount bearish derivatives bets on Nifty on Fed taper talk

Mumbai: Overseas fund managers have mounted bearish derivatives bets on the Nifty on the heels of the US Federal Reserve’s warning last week that interest rate increases in the US could happen in 202, earlier than expected . While turning net sellers since the American central bank’s meeting on June 16, these investors have taken positions in futures and options contracts as insurance against a likely dip in their share portfolio or to simply bet that the market will drop as the benchmark indices — Nifty and Sensex — hover around record levels.

The long to short ratio — a measure of the number of bullish positions versus bearish — of overseas investors in Nifty futures declined to 65% on Wednesday from the year’s high of 88.87% on May 27. This shows these investors are cutting their bullish bets on Nifty futures.


Similarly, foreigners bought over 1.04 lakh index put options contracts since June16 compared to 41,867 index call options. Currently, the cumulative outstanding index put option contracts are 2.48 lakh compared to 1.53 lakh index call option contracts. When a put option is purchased, the bet is on the downside. Buying call options means a trader is expecting the market to rise.

“FPIs long-short ratio shows they are liquidating some long position and adding short position even as the index remains in lifetime high zones,” said Chandan Taparia, derivatives & technical analyst, Motilal Oswal Financial Services. “FPIs put and call positions indicate either they are hedging their existing long positions or might be taking some contra bets due to any upcoming unseen fear.”

Foreign Portfolio Investors (FPIs) have consistently sold shares since June 16 after the Fed meet. These investors sold stocks worth Rs 2,700 crore since June 16 excluding the inflows on June 18, when they purchased shared in Carlyle’s share sale of SBI Cards worth Rs 4,800 crore.

Analysts say the market will behave on the basis of how the Fed gets out of the ultra-accommodative monetary policy regime aimed at providing liquidity after Covid-19 impacted businesses in the past15 months.

“A gradual exit from the infusion of liquidity by Fed will not present any major risk in the near term for the emerging markets,” said Sanjay Mookim, head of research, JP Morgan India. “In the mid-term we expect the broader market to remain volatile due to higher valuations and events risk.”

The US Fed, according to analysts, could start the taper talk by September 2021 with actual tapering starting early next year with the first rate hike in Q1 of 2023.

“The big difference between the taper tantrum of 2013 and today is that the eventual tapering is very well communicated and hence there is no surprise element for the market allowing the market to digest it slowly,” said Amit Shah, head of India equity research, BNP Paribas. “Also, during 2013 taper tantrum, markets like India, which saw significant rupee depreciation, should see relatively stable currency this time around on account of record levels of USD reserves. Hence, while there can be near-term volatility, we do not believe there will huge outflows by FIIs given lowering of Covid cases as well.”