Foreign institutional investors (FII) used Wednesday’s market recovery from intra-day lows to double down on selling in both cash and derivatives market segments. This promises to make the Thursday expiry a volatile affair.
A day ahead of the weekly Nifty expiry, FIIs net sold shares worth a provisional ₹4969.30 crore in cash as per BSE, and ₹425.81 crore of index futures (Nifty and Bank Nifty) as per NSE.
The Nifty swung 346.35 points between the intra-day low of 22798.35 – remember that 22800 is a crucial support – and the intra-day high of 23144.7, before paring some of the gains to close a tenth of a percent lower at 23045.25 .
“FIIs might have raised shorts here in anticipation of a disappointment in US core consumer price index reading for January, which raises the chances of a volatile weekly Nifty expiry,” said Rohit Srivastava, founder of analytics firm IndiaCharts.
The fears turned out true: Data released late evening showed US inflation in January rose by the most since August 2023, diluting chances of multiple Federal Reserve interest rate cuts this year. Core CPI, which excludes food and energy prices, increased 0.4% against an estimate of 0.3%.
US bond yields rose, with the benchmark 10-year paper trading up 11 basis points at 4.65% as of Wednesday evening. As of midnight, the Dow Jones index was trading 0.45% lower.
FPI selling in the fiscal year through 11 January has hit ₹1.03 trillion, NSDL data showed, the most after the record ₹1.4 trillion in FY21.
Why markets could turn more volatile
Traders anticipating volatility and the likely downward trend sold a huge quantity of the in-the-money call of Nifty strike 23000, which indicates that they expect the index to remain flat or close lower, so they can pocket the premium paid by the call buyers.
Of the total outstanding positions of 69,607 contracts, 44403 contracts were added on Wednesday.
“Markets might be oversold for now, but selling of-in-the-money call is a signal of further turbulence in markets,” said Sudhir Joshi, consultant, Khambatta Securities.
In the recent past, market veteran Nilesh Shah, managing director, Kotak Mahindra AMC, said that foreign investors were on a “Quit Emerging Market Movement” amid rising US bond yields and, on optics to show President Trump that they were investing money in the US to “curry his favour.”
He said the FIIs’ selling in India was expedient as foreigners were able to exit the market because of the liquidity provided by domestic investors bidding at lower prices.
Only 14% of fall in FPI assets due to selling
Interestingly, FIIs’ total India equity assets shrank 16% to $782 billion at end-January fortnight from $930 billion at the fortnight ended September 2024, when markets hit record highs.
FPI outflows of $21 billion caused just 14% of the decline in assets with 86% of the $148 billion decline attributed to the stock price correction.
The Nifty has fallen 12.29% from a record high of 26277.35 on 27 September 2024 through Wednesday’s close of 23045.25.
Leveraged retail positions cut
The fall in markets has singed retail investors who borrow funds from brokers to buy stocks under the margin trading facility (MTF) on the exchanges.
The cumulative MTF book which stood at ₹78,099 crore on Friday plunged to ₹67,756 crore on Monday as brokers squared off leveraged positions with clients unable to furnish top-ups as shares fell.
This means if a stock costs ₹100 a share and a broker funds 60% or ₹60, the client has to put up ₹40 or 40%. If the fall in stocks is such that a client has to maintain 40% but can’t provide the margin to the broker, the latter squares off the position.
“The fall in MTF underscores the closure of leveraged positions,” said Joshi.
