FIIs' bearish derivatives bets on India surge to a 5-month high
Overseas fund managers
' bearish derivative bets on India are at a five month-high as simmering uncertainties around tariffs and rich share valuations have made them wary about the market's near-term prospects.
The long-short ratio-a
market sentiment indicator
that compares the number of traders betting on a rise in prices (long positions) to those betting on a fall (short)-based on foreigners' derivative positions stood at 15% on Friday-lowest since February 21.
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Lower ratio reflects an aggressive build-up of short positions and a cautious near-term outlook from institutional investors, said Sudeep Shah, head, technical and derivative research at SBI Securities.
The ratio has sharply dropped from 36.7% at beginning of July, and from 20.2% at end of previous week, indicated data from SBI Securities. "Global trade tariff-related uncertainty amid fresh tariff threat by US to BRICS members and fresh tariff letters to many countries across the globe, along with muted quarterly numbers are the key reasons behind the recent fall in FIIs'
long-short ratio
," said Vipin Kumar, assistant VP of derivatives and technical research at Globe Capital Market.
The long-short ratio of foreign portfolio investors' bets was between 10% and 20% late last year and early in 2025, when the sentiment was a lot more bearish. Nifty and Sensex, which gained about 13% in over three months, declined nearly 1% each, marking their third straight weekly drop after a weak set of earnings by some banks and IT companies contributed to the weakness.
Nifty ended at 24,968.4 levels on Friday, below the 25,000 mark for the first time since June 23. In July, FPIs have net sold Rs 17,000 crore after buying Rs 7,500 crore in June and Rs 11,770 crore in May.
Last week, Citi downgraded India to 'neutral' from 'overweight', citing elevated valuations and a moderation in earnings growth forecasts. Jefferies' global equity strategist Chris Wood said markets are celebrating the 'AI capital expenditure trade' while ignoring risks from US President Donald Trump's renewed tariff agenda.
While technical charts are pointing to weakness in the stock market in the near-term, an extremely low reading of the long-short ratio is often taken as a signal that the worst is over.
'It's worth noting that historically (6 times since January 2022), whenever the FII longshort ratio drops below the 15% mark, markets often witness a limited downside, as excessive pessimism tends to set the stage for short-covering rallies or a reversal in sentiment,' said Shah.
It will be important for the Nifty to stay above 24,800 for the sentiment to turn positive. 'Nifty's decisive close below 24,800 spot levels will be a negative development that might take it down towards 24,000 spot levels in near term, said Kumar. 'Although that will provide a fresh entry point for swing traders and value buyers,' he said.
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