FPI bearish bets at extreme levels may spark a recovery

A rebound in Indian stocks may be on the horizon after foreign investors' bearish bets reached extreme levels on Wednesday, a day ahead of a smart recovery underscored by investor belief that US-India tariff tensions could abate following news of a possible Putin-Trump meeting next week.

- Ram Sahgal

The benchmark Nifty 50 index on Thursday recovered from a low of 24,344.15 to close up a tenth of a percent at 24,596.15 in the last two hours of trading, data from the National Stock Exchange (NSE) shows.

"Markets believe that growing chances of a peace deal in Ukraine could ease the US-India tariff tensions, which is why they probably recovered on Thursday," said Ashish Gupta, CIO, Axis MF. "I would wait and see how the situation evolves before forming a view on a sustainable recovery."

FPIs cut their Nifty and Bank Nifty long-short ratio to 8.58% on Wednesday to hedge their $822-billion India portfolio of Indian stocks, anticipating steeper US tariffs. This means out of every 100 open positions, less than nine are long and the rest are short. If the markets fall, these short futures position cushion the value erosion in FPI portfolios.

In addition to these shorts, FPIs are net short index call options and long index put options.