Mumbai: Overseas investors have mounted bearish derivatives bets on the Nifty as uncertainty in the US bond markets has made riskier assets like emerging market equities prone to sharp swings. Foreign funds have mopped up put options of Nifty and Bank Nifty, possibly as a hedge against their share portfolios or as a wager that these indices could slide further. A purchase of a put option indicates bearishness.
Foreign Portfolio Investors (FPIs) raised their cumulative option index put longs by a net 15,350 contracts to a total of 1.37 lakh contracts on March 4. On March 5, they increased net put purchases by a cumulative 8,924 contracts to 1.46 lakh contracts.
The cautious sentiment was further underscored through a sharp cut in bullish positions in Nifty and Bank Nifty; they have cut their call option and index futures bets. When a call option or futures is bought, the market participant is hoping that the underlier index or stock will advance.
After months of optimism, FPIs have turned cautious on Indian markets, with flows becoming unpredictable of late. The reason is the rise in the benchmark US bond yield, which surged to 1.54%, up 18.5%, from 1.3% a fortnight ago on expectations that an economic recovery would stoke inflation and force the US Federal Reserve to revisit its easy monetary policy — a trigger for the flows into emerging markets like India.
The spike in the US 10-year bond yield since February 16, when the Nifty hit a record high of 15,431.75, has raised fears among investors of surging volatility in EMs like India, sparking fresh purchases of hedges. The Nifty is 3.2% away from its record highs. Bullish bets on index (Nifty and Bank Nifty ) call options were cut by 14,589 contracts on March 4. They also cut their bullish index futures bets on the two indices by 20,495 contracts, cites ETIG Database.
While the jump in US bond yields has soured the market sentiment, analysts are ruling out a trend reversal in the Indian markets.
“It’s more of a correction within a bullish trend, given the rising yields in the US and the fact that valuations are overstretched,” said UR Bhat, director of FII advisory Dalton Capital Advisors.
Analysts are expecting more profit booking in the days ahead, especially if the US yields rise from current 1.5% levels.
“Volatility would increase from hereon, but a collapse is very unlikely,” said Hitesh Jain, lead analyst, institutional equities, Yes Securities. “I think the US 10 year could top out around 1.7%. The effect on an EM like India would translate into a range of 13800-16000 in the next three months.”
Bhat also added that developed economies’ central bankers wouldn’t “brook runaway yields” given the “humongous levels of government indebtedness.”
In the very near term, Bhat forecasts a 300-400 point plus or minus move from 15000 for the bellwether Nifty.