Foreign portfolio investors have increased their cumulative shorts on Nifty and Bank Nifty futures to 277,164 contracts on Monday, just 1,853 contracts below the record bearish positioning of 279,467 contracts seen on March 27, according to analytics firm IndiaCharts citing NSE data. The FPI long-short ratio has fallen to 7.58%, compared with 15.4% on March 27, indicating even more extreme bearish positioning. This setup mirrors conditions seen earlier this year when markets bottomed out, with analysts believing Indian equities could be approaching a similar turning point.
The Nifty 50 ended at a two-month low of 23,123 on Monday after geopolitical tensions involving Iran, Israel and the US weighed on sentiment and triggered broad-based selling. The index opened nearly 280 points lower before recovering part of its losses, but selling pressure returned during the second half of the session. Trading volumes were slightly higher than the previous session, resulting in a distribution day as the index declined more than 1% on increased turnover. The benchmark is trading 2.37% below its 50-day moving average and closed below the lower Bollinger Band, indicating near-term weakness.
The recent correction in AI stocks, which had previously drawn capital away from emerging markets like India into the US and Taiwan, presents a potential silver lining for Indian markets. The US 10-year bond yield has climbed from 3.96% at the end of February to 4.54% on Friday, according to Investing.com, with the recent move above 4.5% beginning to weigh on overly valued technology stocks. The Nasdaq posted its biggest single-day decline on Friday, falling 4.18% after stronger-than-expected US jobs report fueled expectations of an interest rate hike. This global rotation could force FPIs to cover their short positions in Indian index futures, potentially triggering a sharp rebound in a market that has fallen 12% from its record high of 26,373.2 on January 5 to Monday's close.
Market breadth remained weak across both benchmark constituents and the broader market, with heavyweight stocks including Reliance Industries, HDFC Bank and Larsen & Toubro together contributing more than 92 points to the index's decline. Open-interest data pointed to fresh short build-up, while momentum indicators continue to favour the bears. The 14-day RSI slipped below 40 and closed at its lowest level since April 1, with the negative directional indicator remaining above the positive directional indicator. A rising ADX suggested the prevailing downtrend was strengthening, with immediate support placed in the 23,000-23,100 zone.
Analysts point to April as evidence of how quickly sentiment can reverse, with the Nifty rising 7.5% during the month to close at 23,997.55, its strongest monthly gain in 28 months, after FPIs reduced their net short positions from a record 279,467 contracts on March 27 to 184,476 contracts by the end of April. Rohit Srivastava, founder of IndiaCharts, noted that markets tend to bottom out on a sliver of positive news when FPI short readings on index futures go to extreme levels, with the positive news for now seeming to be a correction in AI stocks. Rajesh Palviya from Axis Securities pegged the short-term range at 23,000-23,800, while FPIs have sold a record $31.24 billion worth of Indian equities in the cash market this calendar year, contributing to the 12% decline from January highs.
