FPIs pare bank Nifty shorts ahead of RBI policy

Mumbai: Foreign investors are scaling back their bearish bets on banking stocks ahead of the Reserve Bank of India's (RBI) policy decision on Wednesday, raising the prospect of further gains in the Bank Nifty if the central bank delivers an expected rate hike without any negative surprise.

The RBI's rate-setting committee is widely expected to raise the repo rate — at which it lends to banks — by 25 basis points to 5.50% on Wednesday, the first such increase in more than three and a half years, while holding its neutral policy stance. Markets have largely priced in both the rate increase and an unchanged stance, with investors now looking for signs that could support a further rally, experts said.

After net selling incremental Bank Nifty active futures contracts worth ₹1,980 crore between 7 September, when the latest futures began trading on the National Stock Exchange (NSE), and 25 September, FPIs bought back or covered ₹906 crore worth of shorts over the following five sessions through Monday, according to NSE data.

Short covering — when a bearish investor buys back a contract sold earlier — can push up the price of the underlying stocks as those positions are unwound. Markets expect continued short covering to support a short-term rally in banks after the policy outcome, provided there are no adverse surprises from the MPC or a fresh escalation in Middle East tensions.

Banks are set to stage a rally post the policy due to "improving credit prospects and comfortable liquidity position, thanks to the FCNR(B) raise," said Nirav Karkera, head of research and fund manager at W by Groww, the wealth management service of Groww. He cautioned that all bets could be "off the table" if the outcome were to differ from market expectations or global tensions were to escalate suddenly.

Net shorts fell

FPIs' incremental net shorts in active Bank Nifty futures contracts fell from ₹1,980 crore as of 25 September to ₹1,074 crore as of 5 October. The cumulative net short position in index futures, largely comprising Nifty and Bank Nifty contracts, stood at ₹54,444 crore as of 5 October, down from ₹62,706 crore on 25 September — indicating that FPIs also covered positions in Nifty futures, the data showed.

That earlier shorting was in large part responsible for the Bank Nifty falling 6% from 57,701 on 7 September to 54,175 on 29 September. The index has since recovered, rising 1.5% to 54,923 on Monday and a further 0.6% to 55,271 on Tuesday — pointing to continued buying, though Tuesday's futures-position data will be available only after press time.

A short-term rally is also being supported by oversold conditions and an improvement in credit growth, said S.K. Joshi, consultant at Khambatta Securities. A rate hike can also initially support banks' net interest margin, since loan rates linked to external benchmarks, like the repo rate , reprice faster than deposit rates, he added.

Positive on banks

“We are positive on banks and expect no negative surprises from the MPC meeting,” said Swarup Mohanty, vice chairman and chief executive officer (CEO) of Mirae Asset Investment Managers (India) Pvt. Ltd.

“So long as there are no negative surprises on the rate and stance perspectives, domestic buying complemented with further FPI short covering should be a positive. Thanks to FCNR(B) deposits of $127 billion, banks are flush with funds at a time credit growth has begun to pick up,” Mohanty added.

Hedging

FPIs also use index futures to hedge part of their underlying portfolios, selling futures to offset potential losses during periods of market volatility, such as the current environment of rising oil prices and a weakening rupee.

FPIs held Indian equity assets worth ₹66.17 trillion at the end of September, of which ₹20 trillion, or about 30%, was in financial services, according to depository data.

Against total FPI equity assets of ₹66.17 trillion, the cumulative net position of about ₹55,000 crore in index futures, including Nifty and Bank Nifty, accounted for only about 0.8% of their overall portfolio.

“Hedges as a proportion of total FPI assets is relatively very small,” said Joshi of Khambatta Securities.