Retail investors are helping to balance the selling by foreign institutional investors (FIIs) after the recent budget. This is shown by a drop in India’s fear gauge, the India VIX, to a three-month low on Wednesday, despite wild intraday market swings.
Shares Sold
In the past two days, FIIs have sold shares worth almost ₹6,700 crore due to an increase in capital gains tax on shares in the budget. They also reduced their bullish index futures positions, leading to market volatility. However, retail investors and high net worth individuals (HNIs) are cushioning the impact by buying in cash and derivatives segments.
Negative Reaction
“FIIs are reacting negatively to the tax increase, but retail investors are helping to stabilize the market,” said U.R. Bhat, co-founder of Alphaniti Fintech. “The drop in VIX over the past two days shows that uncertainty is decreasing for now.”
On Tuesday, FIIs sold shares worth ₹1,548.64 crore, and another provisional ₹5,130.9 crore on Wednesday, totaling ₹6,679.54 crore. On the other hand, domestic institutional investors (DIIs) bought a net ₹4,556.1 crore in cash.
In futures, FIIs reduced their bullish positions to 54,771 contracts from 283,153 long contracts on Tuesday. Meanwhile, retail and HNI investors closed out 72,785 short index futures, taking their net short outstanding contracts to minus 120,149 contracts.
“Closing out a short involves buying it back at a lower price, which helps absorb the FIIs’ selling pressure,” said Chandan Taparia, senior vice president at Motilal Oswal Financial Services.
Buying by Retail Investors
This buying by retail investors through mutual funds in cash and derivatives has softened the market decline. The Nifty has only fallen by 96 points over the two sessions, closing at 24,413.5 on Wednesday from 24,509.25 on Monday.
Despite wild intraday swings, such as a 508.35-point fluctuation on budget day and 197 points on Wednesday, the overall market trend remains stable thanks to retail buying.
VIX
The India VIX fell 24% to 11.76, the lowest since April 26, over the two days, showing reduced market uncertainty.
“While there has been high intraday volatility, the lower closing numbers indicate the market trend is holding,” explained Taparia. FIIs are expected to have further reduced their long index futures positions on Wednesday, said Rajesh Palviya, head of derivatives & technical research at Axis Securities.
In April-May this year, when FIIs sold ₹34,257 crore worth of shares, DIIs absorbed this by buying shares worth ₹99,919 crore. This helped the Nifty recover from a low of 21,778 on April 19 and close at 22,530 by the end of May.
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