FPI bets tilt most on the side of bears since 2020

Mumbai: Foreign fund managers are the least optimistic about Indian markets in over two years if their bullish derivative bets compared to their bearish ones are to go by.

The long-short ratio - a measure of market sentiment - of overseas investors' positions is at 22%, the lowest since March 2020 when equities crashed on account of the spread of Covid, as interest rate tightening by central banks in developed markets to contain inflation has led to a flight of capital from emerging markets.

"The ratio is the lowest since March 2020. The FIIs are continually adding short positions," said Chandan Taparia, derivative analyst, Motilal Oswal.

Foreigners have extended their selling spree in domestic shares to the seventh straight month in May as rate tightening fuels fears of a growth squeeze. FPIs pulled out over ₹7,700 crore from Indian markets in the first week of May. On Monday, they sold Indian shares worth ₹3,300 crore. FPIs have sold about ₹1.4 lakh crore worth of Indian stocks so far this year.

Analysts said the weakening of the rupee to all-time lows against the dollar could lead to foreigners selling further.

"As equity flows can dominate interest-rate sensitive flows, there is a high downside risk to the rupee from a deterioration in equity market sentiment as a result of a rapid tightening in domestic financial conditions," said BNP Paribas in a recent note to clients. The bank has retained its 'slightly bearish' outlook for the rupee. "India's commodity terms of trade are likely to deteriorate further, and potential restrictions on exports of inflation-sensitive food items could pose additional headwinds," it added.

Besides these concerns, there are rising fears that the global market could see a slowdown in growth due to other factors such as China's zero Covid policy and the continued Russia-Ukraine war.

"The (long-short) ratio shows they are heavily short in the market at 78% and long positions are only 22%. Markets may go down further and with the currency hitting an all-time low, it will trigger further selling by FIIs," said Rajesh Palviya, head-technicals and derivatives, Axis Securities. "Interest rate cycle has reversed and so they have to sell their leveraged positions across the globe and move back investments to the US."

Some analysts see the sharp fall in this ratio as a contrarian indicator.

"A much lower ratio can also be a contrarian indicator wherein they may come to cover short positions on any positive trigger," said Taparia.