Key ratio hints at end of FPI selling for now

MUMBAI: Is a market recovery on the cards after the recent bout of selling? A key derivative market ratio that measures the sentiment of foreign portfolio investors (FPIs) shows most of the recent selling by these institutions might be over for now.

On an average, the long-short ratio for index futures of FPIs has been more than three times in the past three years. This means FPIs have bought three buy contracts of Nifty futures for every one short contract. At present, the long-short ratio stands at 0.79. It has been observed that if the long-short ratio has slipped below 0.79, it bottoms out on an average in six trading sessions. After the long-short ratio touches the bottom of the cycle, Nifty stages a sharp bounce-back.

“The worst for the markets seems to be over, Nifty may resume its secular uptrend,” said Hemant Nahata, senior derivatives analyst at IIFL. “Foreign institutional activity indicates a high degree of index protection buying, while past trend suggests that such rise in hedging position is often followed by a reversal in market movement.”



There were four instances in past three years when the Nifty long-short ratio had fallen below 0.78. Soon after that, the index has bounced back every time, posting an average return of 11% over next 20 days. In August 2013, the Nifty long-short ratio fell to 0.59 times following which the index gained 15% in the next 15 trading sessions.

The Nifty ended 0.10% lower at 8,365 on Tuesday. The index has bounced back around 4% from its recent lows of 7,997, and is currently trading above its 200-day moving average. The outstanding positions, or open interest, of FPIs in Nifty put options is estimated to be at its highest level since September 2013. In the past, market falls have halted when put hedges were bought aggressively.

“Data indicators suggest that FIIs are done with their selling in markets,” said Chandan Taparia, derivative analyst at Anand Rathi Securities. “Traders are looking forward to positive triggers from RBI on rate cuts, and monsoon.

Sentiments have also reversed with the Nifty support base shifting upwards to 8,200, from 8,000.” Average daily purchases by FPIs in the last six trading sessions have been Rs 150 crore in cash market, compared to an average daily selling of about Rs 725 crore in the preceding three-weeks. NSE India VIX, an index to measure market volatility, has also dropped to 18.27% from its recent three-month high of 21.5%.