FPIs turn bullish on index futures amid escalating India-Pakistan tensions, but risks loom
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Foreign portfolio investors (FPIs) are showing growing confidence in India's markets, undeterred by the escalating tensions between India and Pakistan.
On the heels of India's air strikes across Pakistan and Pakistan-occupied Kashmir, FPIs made a notable shift by turning net long on index futures (Nifty and Bank Nifty) for the first time in seven months. While this move signals optimism, analysts warn that any retaliatory action from Pakistan could change the market's trajectory.
On Wednesday, FPIs turned net long by 458 contracts—their first net long position since 4 October, when they held 27,662 contracts, according to IndiaCharts.
Read this | FPIs bet on limited Nifty movement amid simmering India-Pakistan tensions
This shift in index futures follows their return as net buyers in the cash market after six months of relentless selling, during which they offloaded ₹2.85 trillion worth of Indian shares through March, NSDL data shows. The reversal suggests a partial diversion of funds from the US to other markets amid a weaker dollar and trade war uncertainties.
FPIs' renewed buying has helped fuel a 12.3% rebound in the Nifty, which rose from a low of 21,743.65 on 7 April to 24,414.40 by Wednesday's close. In April alone, FPIs invested ₹3,243.03 crore in the cash market—their first net buying since October—with additional inflows of ₹7,954.17 crore in May, per NSDL data.
Their buying of index futures reflects a shift in sentiment toward India after a prolonged period of bearishness in both the cash and derivatives segments. This shift comes amid ongoing global tariff tensions and India's retaliatory air strikes on Pakistan following the 22 April terrorist attack in Pahalgam, where 26 people were killed, according to the defence ministry.
"Markets haven't really priced-in any retaliatory action from Pakistan, after the Indian air strikes," highlighted Nilesh Shah, managing director, Kotak Mahindra Asset Management Company, attributing the strong institutional flows to investor optimism. But he warned that any escalation from Pakistan could negatively impact the markets.
Read this | Tensions are rising on the border but FPIs aren't worried
Rohit Srivastava, founder of IndiaCharts, said he would wait to see a few more sessions of FPI behaviour before concluding that there's been a "change of slant" in the cash and derivatives segments.
FPIs had been building short positions in index futures since October, reaching a record high of 200,890 contracts by 24 February this year. Since then, they have been steadily closing out those bearish bets, eventually turning net long on Wednesday.
Before the recent shift, FPIs held a record high long position of 130,719 contracts on 4 July last year, per IndiaCharts data, adjusted for the Nifty lot size revision to 75 shares from 25 shares effective November.
Also read | Will lower tariffs lure back FPIs from other emerging markets?
Srivastava noted that the Nifty is approaching a key resistance level of 24,545, representing a 61.8% retracement of its fall from a record high of 26,277.35 on 27 September 27 to the 7 April low.
The index would consolidate unless it "decisively breaks" the important resistance of 24,545, according to Srivastava.
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