Foreign Portfolio Investors, who have been steady sellers in Indian equities throughout August, are once again showing a sharp bearish tilt in the futures market. According to Bloomberg data, their short positions in index futures have remained more than ten times higher than their long positions since the second week of August. This ratio is significant because such extremes were last observed in March 2023, a period marked by heavy selling and uncertainty.
As of the end of last week, short positions made up more than ninety percent of the total bets in index futures, signaling a deep lack of conviction on the upside. Analysts note that such high short percentages usually mean the markets have entered oversold territory. Historically, whenever index futures start an expiry cycle with short levels above eighty five percent, short covering has triggered a temporary bounce in the spot market.
The pressure on Indian markets is not being driven only by technical positioning. Global developments have added a layer of uncertainty. US President Donald Trump’s announcement of tariffs as high as fifty percent has rattled foreign investors, who are concerned about the long term impact on India’s exports and its relations with the United States. These worries, combined with muted earnings growth and already stretched stock valuations, have reinforced bearish sentiment.
So far in August, FPIs have pulled out nearly sixteen thousand seven hundred crore rupees from Indian equities, adding to the downward momentum. Meanwhile, Domestic Institutional Investors have stepped in aggressively, investing more than fifty five thousand crore rupees during the same period. Market watchers suggest that if DIIs manage to keep the benchmark Nifty above twenty five thousand, it could force FPIs to unwind some of their short bets, creating a wave of short covering.
Technical experts are also closely monitoring support and resistance levels. For the Nifty, a sustained move above twenty four thousand eight hundred points could open the door for a rally toward twenty five thousand two hundred. For Bank Nifty, the crucial level is fifty five thousand, where any decisive move higher could shift momentum. Still, traders caution that even if such a bounce occurs, it is likely to be more tactical than structural. Since September of last year, most short covering rallies have lifted the index by only five to six hundred points compared to thousand point rallies in earlier years, indicating weaker follow through.
The backdrop remains challenging. Brokerage surveys show that India has fallen from being the most preferred Asian market among global fund managers in May to the least preferred by August. This sharp reversal underscores how quickly sentiment has shifted. While domestic inflows remain supportive, the dominance of FPI short positions means volatility will remain high in the coming weeks.
For investors, the message is to stay cautious. Near term bounces may offer trading opportunities, but the combination of weak earnings forecasts, expensive valuations, and global headwinds means the overall outlook remains fragile. Long term investors will need to be selective, focusing on quality stocks with resilient earnings growth to ride out the turbulence.
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