FPIs Boost Bearish Bets on Indian Stocks as China’s Market Rebounds Amid Geopolitical Tensions

Mumbai: Foreign fund managers have increased their bets against Indian stocks, reaching the highest level in a month. This shift comes as Chinese stocks show signs of recovery and rising tensions between Israel and Iran lead investors to rethink their exposure to Indian markets.

The long-short ratio, which measures the balance between foreign investors’ bullish and bearish positions in index futures, dropped to 58% on Friday, down from around 81% on September 27. A lower ratio means investors are cutting down on their bullish bets and increasing bearish ones.

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Indian Markets Experience Significant Losses

Last week, the Sensex and Nifty both dropped by around 4.5%, marking their largest weekly loss since June 2022. Foreign portfolio investors (FPIs) sold Indian shares worth ₹9,897 crore on Friday, bringing their total sales to ₹37,000 crore over the last four trading days. This is the highest level of selling in a single week, despite FPIs investing ₹35,575 crore in Indian markets in September.

The current long-short ratio indicates the possibility of more market declines, according to experts. “Due to the ongoing tensions between Israel and Iran, foreign investors have reduced their bullish positions and increased bearish bets,” said Rajesh Palviya, senior vice president of research-technical and derivatives at Axis Securities. He warned that the Nifty could see a further drop of around 5%.

Analyst Predictions for Future Market Movements

Traders often view the FPI long-short ratio of Nifty futures as a key signal of whether the market is oversold or overbought. “At the start of October, FPIs had an 81% long position, which historically suggests caution and signals short-term market peaks,” said Ruchit Jain, lead research analyst at 5Paisa. However, the current 58% ratio isn’t extremely low, leaving room for further declines.

In comparison, the lowest long-short ratio was 12.4% on February 28, 2020, when COVID-19 fears first took hold, and the highest was 92.6% in 2014. Jay Vora, a senior market analyst at indiacharts.com, noted that substantial short positions often lead to a market upswing when those shorts are later covered.

Chinese Market Rebound Draws Investor Attention

The surge in bearish positions by FPIs is partly due to the recent rebound in Chinese stocks, which has attracted more foreign investment. China’s government has introduced stimulus packages aimed at revitalising its economy, and the valuation gap between Chinese and Indian markets is currently in favour of China, according to analysts. This may encourage foreign investors to shift their focus to China in the near term.

Sectors Affected by the Bearish Bets

FPIs have been especially bearish in rate-sensitive sectors like banking and automotive. “There is a significant increase in short positions in banks and auto sectors, which may signal profit-taking,” said Palviya. In contrast, foreign investors remain bullish on pharma and metal stocks, with long positions in companies like JSW Steel, Sun Pharmaceuticals, and Lupin Pharma.

Over the past week, the Bank Nifty and Nifty Financial Services Index fell by 4.41% and 5.2%, respectively, while the Nifty Auto Index dropped by 6.10%. Meanwhile, the Nifty Metals Index rose slightly by 0.48%, and the Nifty Pharma Index dipped 1.8%.