Amid increased global uncertainty induced by the collapse of three US banks over a week, foreign portfolio investors (FPIs) have raised cumulative bearish positions on Nifty and Bank Nifty futures to a three -year high of 171,679 contracts. The positions have been built ahead of the US central bank meeting on interest rates later this week and amid western banking regulators scurrying to create backstops to prevent contagion from the crisis-hit Silvergate Corp., Silicon Valley Bank, Signature Bank, and Swiss lender Credit Suisse.
The last occasion when FPIs initiated such huge short positions was on 17 March 2020 around the time the pandemic struck, said Rohit Srivastava, founder, IndiaCharts .
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At the time, FPIs shorted 173,133 contracts, which resulted in the Nifty tanking 1,456 points to a multi-year low of 7511.1 just five days later. To be sure, markets began a recovery after that.
This time around too, analysts say such a bearish creation could cause short-term volatility in the run up to the Fed policy decision on Wednesday, wherein the US central bank is widely expected to hike the rate by 25 basis points (bps) (0.25%) and provide details on emergency measures to prevent a financial contagion.
“There’s no real domestic trigger, just global news flows behind the FPI actions,” said Rajesh Baheti, managing director, Crosseas Capital, one of the country’s largest proprietary brokers. “They expect a bumpy ride as the banking crises in US and Europe unravel and as the Fed sheds light on safety of depositors’ money at its mid-week meeting. Until the situation stabilizes, volatility will be the order of the day.”
Interestingly, Sunil Singhania, founder of Abakkus Asset Management, told Mint earlier that a rate hike of even 25 bps would be construed as a “negative” with markets having priced in a pause induced by the collapse of the three US tech-focused banks.
FPIs take such futures positions to either hedge their cash market portfolios or to simply punt on anticipated volatility in the short term.
A bearish futures contract position enables them to offset a loss on their portfolios in the event of a market correction. This is because through the contract, they sell the Nifty or Bank Nifty indices at a predetermined rate.
If indices fall thereafter, they gain as buyers are obliged to buy the indices at the higher rate contracted earlier. Actually, only the price difference is exchanged as indices cannot be delivered.
“What such positions do is to offset the loss to their cash market portfolios,” said Srivastava. He believes the heavy shorting itself could result in a reversal of markets in the event of any positive trigger as that would force FPIs to cover their shorts.
Between 10 March and 17 March (5 trading sessions) alone, FPIs increased their cumulative bearish bets by 50,792 contracts.
Coinciding with this, the Nifty fell 1.8% to 17,100 while the Bank Nifty slipped 2.2% to 39,598.
Market experts expect more downside pressure on indices until the US Fed’s rate decision on Wednesday to which Indian markets are expected to react on Thursday.
“There will be more downward pressure until clarity emerges on what Fed is doing to stop any likely contagion,” said Rajesh Palviya, technical head, Axis Securities.
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