Foreign institutional investors’ (FIIs) bearish bets in the index futures segment have climbed to their highest level in about five months, highlighting growing caution amid weak market sentiment, even as some analysts see the possibility of a sharp reversal through short covering. On September 10, FIIs held 3,21,538 short index futures contracts, against 39,694 long contracts, taking the long-short ratio to around 11 per cent, a historically low level.
According to market data, FII short positions have risen steadily and are now at levels last seen around April. Long positions have also increased, indicating heightened participation rather than a withdrawal from the market.
Anand James, Chief Market Strategist at Geojit Investments, said, “We have not seen such a build-up in index futures shorts for a long time. The current positioning is among the highest seen this year. While the long-short ratio remains near historic lows, both long and short positions have been rising, suggesting FIIs are actively taking tactical positions ahead of a potentially large market move.”
James added that the sizeable short base could fuel a strong short-covering rally if sentiment improves, as current positioning resembles levels seen around April, which preceded a sharp market rebound. However, he said a sustained rally would require stronger fundamental triggers and did not foresee an immediate return to record highs.
“Markets typically turn bullish when the FII long-short position ratio rises above 40 per cent. With the ratio currently around 11 per cent, market positioning remains highly bearish,” said Sudhakar Reddy, Associate Professor at IIM Calcutta.
The market is closely tracking inflation data, interest-rate expectations, oil prices and global bond yields for cues, James said. “The sharp build-up in FII index futures shorts suggests that traders are positioning for a significant move. At the same time, because short positions are at their highest levels seen since April, any improvement in sentiment could trigger a strong short-covering rally,” he added.