A battle of nerves has built up in India’s derivatives market with foreign portfolio investors (FPIs) betting the indices will rise further, while an opposing camp of retail and wealthy investors is equally convinced they can correct.

Even as markets have hit record highs, National Stock Exchange’s Client category—comprising largely high-net-worth individuals (HNIs) and retail investors—has taken a sizeable bearish position on index futures contracts, mainly the Nifty and the Bank Nifty, while FPIs have a bullish position on them. NSE data showed that Client held 85,251 cumulative net short contracts as of 22 December, while FPIs held 84,690 net long contracts.


A short position implies caution while a long position means bullish sentiment on underlying indices like the Nifty. Interestingly, the positions of the two investor classes coincide with the Nifty hitting a record high of 21,593 on 20 December.

In recent occasions, the Client category has trumped FPIs. For instance, on 2 November, Client was net long index futures by 146,411 contracts while FPI was net short 175,698 contracts, and the Nifty traded at 19,133.25.

However, from that level, the Nifty rose 12.85% to a record high of 21,593 on 20 December, compelling FPIs to close out their huge short positions, while Client booked profits as the markets kept rising.

Earlier, on 22 March, Client was net long 153,900 contracts, while FPI was net short a record 196,378 contracts. The Nifty, which closed at 17,151.90 on 22 March, rose 18% to a high of 20,222.45 on 15 September, driven by inflation in March moderating below the Reserve Bank of India’s (RBI’s) upper band of 6% and robust corporate results in the subsequent quarters. By mid-September, the Client category had booked profits and turned net short by 37,113 contracts while FPIs had covered all their shorts and turned net long by 62,030 contracts.

From mid-September, however, profit-booking and the Israel-Hamas war caused the market to correct 6.8% to 18,838 by 26 October, by which time FPIs had turned bearish and Client bullish, with the latter having trumped the former yet again .

Now, FPIs are net long and Client is net short. US Federal Reserve keeping a key interest rate steady early this month and the victory of the Bharatiya Janata Party (BJP) in three Hindi heartland states drove the rally from November to date. Currently, the market has priced in all the positives of interest rates having peaked globally and a possible BJP sweep at the Lok Sabha elections next year, said analysts.

The risks to the rally are profit-booking on account of elevated valuations, a dramatic rise in new covid variant cases, and crude oil rising rapidly were Yemeni rebel attacks in the Red Sea to intensify, they added.

“Client has become much smarter than FPIs in recent times and I wouldn’t be surprised if they get it right this time around, too,” said U.R. Bhat, the co-founder of Alphaniti Fintech. “Corrections happen when early investors press the sell button and this compels investors who entered late on the rally to also offload to protect their profits. While the long-term rally might be intact, bouts of profit-booking because of elevated valuations cannot be ruled out.”

The trailing 12-month price-to-earnings multiple of the Nifty has increased from 20.63 times on 26 October when the index made a low of 18,838 to 22.81 times currently. The average for the fiscal year stands at 21.95. For the Nifty Smallcap 250, the valuation is even more elevated —at 26.67 times currently against the average for the fiscal so far at 22.3 times.

Rohit Srivastava , the founder of IndiaCharts, said the readings show “ drastically varied” sentiment between HNI/ retail and FPIs with one assuming a “highly cautious” stance while the other taking on a “highly bullish” view. “Anecdotally, retail has come of age and is getting the better of FPI at this game.”

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