FPIs Slash Bearish Bets Post 2024 Polls, Set Stage for Nifty and Bank Nifty Rally

Mumbai: Foreign investors have significantly reduced their negative bets on index futures since the recent election results, pushing the Nifty and Bank Nifty to new closing highs.

Massive Reduction in Short Positions

On 4 June, foreign portfolio investors (FPIs) held the second-highest net short positions in index futures, with 355,379 contracts. By 14 June, this number had dropped to just 24,415 short contracts. The highest net short positions this year were 392,756 contracts on 22 March.

Analysts Predict

Experts now think FPIs might start buying Nifty and Bank Nifty futures before the Union Budget session later this month, which could lead to further gains in both indices.

Impact of Political Stability

FPIs increased their short positions when the BJP missed a majority in the 2024 Lok Sabha elections. However, with political stability expected under Prime Minister Narendra Modi and key BJP portfolios, FPIs have been closing out these short positions. This move acts as a hedge against their Indian equity assets, worth $797 billion according to National Securities Depository Ltd.

Short-Covering Fuels Rally

This reduction in short positions has driven much of the recent rally. From 4 June, the Nifty rose 7% from a low of 21,884 to 23,465.60 on Friday. Similarly, the Bank Nifty increased by 8.15% from 46,077.85 to 50,002 in the same period.

Shift from Retail

Retail and high net worth investors (HNI) had record long positions of 333,364 contracts on 4 June. These investors have been selling their long positions at a profit to FPIs, who have been buying them back.

Cash Market Activity

In the cash market, FPIs have sold a net ₹3,064 crore so far this month through 14 June. Meanwhile, mutual funds have bought shares worth ₹10,814 crore, and direct retail investors (not through mutual funds) have bought shares worth ₹17,829 crore.

Nifty’s Future Outlook

Analysts believe the recent buying helped the rally, but it was primarily driven by the closing of short positions. Rajesh Palviya, head of derivatives & technical research at Axis Securities, notes that FPIs had built large short positions by 4 June to protect their portfolios. After the formation of the National Democratic Alliance (NDA) government, they have been closing these hedges, which has driven the rally from the 4 June lows.

Potential for Further Growth

Abhilash Pagaria from Nuvama expects the Nifty to test 24,000 from its current level of 23,465.60, with further short-covering by FPIs. He also predicts that the Bank Nifty could rise from its current high of 50,002 to 51,250 within two weeks.

The NSE offers both cash and derivatives segments for equities. While investors can buy or sell shares directly in the cash market, they use derivatives to hedge their positions or speculate.