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Cautious FPIs and Confident Retail Investors Gear Up for Market Clash Next Week

June 3, 2024
Business talk

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The market is on the edge of a tense standoff between optimistic and pessimistic forces next week as election excitement reaches a critical point. Foreign portfolio investors (FPIs) have taken the most significant net short positions in index futures ever recorded, while retail and high net-worth investors (HNIs) show an all-time high bullish stance in their index futures positions.

FPIs’ net short position in index futures at the onset of the June series is nearly (-) 297,800, signaling extreme caution before Tuesday’s vote count. FPIs have been consistent net sellers in India since April, driven by high valuations and the uncertainty of the General Elections. Meanwhile, retail and HNIs boast net long positions of over 296,000 in index futures, marking a record high and pointing to a likely volatile market trend in the upcoming week, according to analysts. The India VIX, a barometer of market volatility, increased by 1.8% to a new two-year high of 24.60 on Friday.

A solid majority for the incumbent government might initiate a rally spurred by short-covering, but the potential for significant gains seems limited. Sriram Velayudhan, senior vice president at Alternative Research, IIFL Securities, indicates that while election results without negative surprises may lead to short-covering, there’s also a chance for profit-taking since retail investors are heavily invested.

The transition of Nifty contract positions to the June series was about 72%, consistent with the three-month average of 71.4% but below the six-month average of 74.7%, as per Nirmal Bang Institutional Equities data.

Rajesh Palviya, senior vice president research (head technical and derivatives) at Axis Securities, observes that some investors are waiting on the sidelines due to the upcoming major event. Post-election results, a buildup of positions is expected.

Velayudhan predicts that the Nifty 50’s potential growth is likely limited to the 23,400/23,500 points range. However, he notes that if the current government secures a strong majority, these levels might be surpassed.

Experts suggest that most FPIs’ short positions are likely hedges rather than speculative bets.

Clarity on the market direction is anticipated over the weekend as exit polls are released following the final voting phase.

Throughout the six-week election period, the Sensex has seen a 2% increase despite volatility. The benchmark index ended a five-day downturn on Friday, climbing 75.71 points or 0.1% to 73,961.31 points. The Nifty followed suit, rising 42.05 points or 0.2% to 22,530.70 points.

Domestic investors have driven these gains, countering the continued withdrawal by FPIs from the market. FPIs have net sold shares amounting to over Rs 34,500 crores, while domestic institutional investors have injected over Rs. 99,900 crores.

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