Indian equity markets are showing signs of entering a turnaround zone after weeks of pressure from foreign portfolio investors. Data reveals that FPIs have maintained short positions above ninety percent in index futures since the end of July. Such a high level of bearish bets is typically seen as a signal that the market has become oversold, raising the probability of a relief rally.
The last time this situation occurred was in March 2023, when both the Nifty and the Sensex staged a remarkable comeback. Within a month, they rose more than five percent, and within three months, gains reached close to ten percent. This historical precedent is now giving investors hope that a similar pattern could play out in 2025.
On Monday, both Nifty and Sensex moved higher by about one percent. Improved sentiment came from multiple developments, including new GST reform proposals, softer crude oil prices, and a sovereign rating upgrade for India. FPIs also turned net buyers, purchasing around five hundred and fifty crore rupees worth of equities, a small but important reversal from the heavy selling seen earlier in August.
Analysts are cautiously optimistic. Osho Krishan, chief manager of technical and derivatives research at Angel One, said that while tariff concerns remain, the combination of global and domestic developments offers a chance for revival in equities. He noted that FPI long positions had risen from eight percent to nearly thirty percent, suggesting that valuations are now more balanced and the market may be gearing up for a bounce.
Brijesh Ail, head of technical and derivatives at IDBI Capital, agreed that the extreme short positioning increases the likelihood of a rebound, though he warned that it could be more of a trading rally than a long-term recovery.
Global factors continue to play a role in shaping sentiment. So far in August, FPIs have sold more than sixteen thousand crore rupees worth of Indian equities. Concerns over tariffs from the United States and the strain in Indo-US relations have weighed heavily on investors. VK Vijayakumar, chief strategist at Geojit Investments, explained that tepid earnings growth and elevated valuations have also emboldened bearish bets. He pointed out that market projections for FY26 earnings are modest at just eight to ten percent, which has given bears confidence to maintain short positions.
Adding to this, a survey by BofA Securities revealed that India has fallen from being the most preferred market in Asia three months ago to the least preferred in August. Yet, despite this negative shift, the Nifty managed to close the recent week at 24,631 points, breaking a six-week losing streak.
Technical analysts suggest that a sustained close above 24,800 could trigger heavy short covering, potentially pushing the index back towards the 25,200 to 25,300 zone. Futures contracts expiring in August, September and October are already trading slightly higher, showing that the market is pricing in some optimism.
For retail investors, the message is mixed but important. On one side, extreme short positioning by FPIs signals that the worst of the selling pressure may be behind us, opening the door for a sharp rally. On the other, global uncertainties and cautious corporate earnings outlooks remind us that the long-term trend is far from certain.
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