Foreign fund managers have established a substantial short position in the Indian markets, leading to a significant drop in the long-short ratio in index futures. This bearish sentiment may present challenges for these fund managers in returning the securities borrowed for short sale in the weeks ahead. Analysts note that historical trends show a significant proportion of short positions often lead to an upswing driven by short covering.
Foreign portfolio investors (FPIs) have been sellers not only in the cash segment but have been on the short side in the index futures segment throughout the October series. They rolled over the short positions to the November series and added fresh shorts at the start of the series. By the end of Friday, FPIs were sitting on more than 200,000 short contracts, while they held only 44,000 long contracts in index futures.
Analysts maintain diverse viewpoints on the possible market repercussions of this situation. Ruchit Jain, lead research analyst at 5Paisa.com, highlights that similar short positions in the past led to FPIs covering their positions, resulting in the Nifty surging past its previous highs and establishing new record highs. On the other hand, Sahaj Agarwal, analyst at Kotak Securities, believes that FPIs taking short positions can be seen as hedging in response to the prevailing volatility and does not guarantee a Nifty rally.
Despite the differing viewpoints, some analysts believe that a recovery could be seen from the current levels. Chandan Taparia, analyst at Motilal Oswal, suggests that if the long-short ratio is maintained over the next one or two months, the market could touch levels of 20,000-20,200.
According to Ruchit Jain of 5Paisa, Indian markets have been reacting to global news flows and the global market’s momentum along with FPIs’ positioning is likely to drive the near-term trend. He suggests that in case of a short covering move, the Nifty could rally towards its resistances, which are seen around 19,370 followed by 19,450 and 19,700, with immediate support placed in the 19,000-18,950 zone.
