FPIs Reduce Bank Nifty Shorts Ahead of RBI Rate Decision

Foreign portfolio investors (FPIs) have been cutting back on their short positions in Bank Nifty futures as the Reserve Bank of India (RBI) readies to announce its latest monetary policy decision. This shift signals growing optimism among global investors about a potential rise in banking stocks if the central bank delivers the anticipated rate increase without any unexpected downturns.

The much-anticipated RBI policy meeting, scheduled for Wednesday, is expected to bring a 25 basis point hike in the repo rate, pushing it to 5.50%. This would mark the first rate increase in over three and a half years, while the RBI is likely to maintain its neutral policy stance. Market participants have largely factored in these outcomes, and now await further cues that could boost banking sector equities.

Data from the National Stock Exchange (NSE) reveals that FPIs had initially accumulated net short positions worth ₹1,980 crore in Bank Nifty futures contracts between early September and the 25th of that month. However, over the subsequent five trading sessions ending Monday, they unwound ₹906 crore of these shorts. This process, known as short covering, occurs when bearish investors buy back previously sold contracts, which can lead to upward pressure on stock prices.

Market experts suggest that this short covering may support a short-term rally in bank stocks following the RBI announcement, provided the Monetary Policy Committee (MPC) avoids any surprises and geopolitical tensions, such as those in the Middle East, do not intensify further.

According to Nirav Karkera, head of research and fund manager at W by Groww, banks are positioned for a rebound after the policy release due to improving credit conditions and a healthy liquidity landscape, partly credited to the rise in Foreign Currency Non-Resident (Bank) deposits. He cautioned, however, that this outlook hinges on the RBI delivering the expected policy without deviation and the absence of sudden global shocks.

FPIs’ net short exposure in Bank Nifty futures decreased from ₹1,980 crore on 25 September to ₹1,074 crore by 5 October. Over the same period, their overall net short positions across index futures, including Nifty and Bank Nifty, dropped from ₹62,706 crore to ₹54,444 crore. This reduction indicates that FPIs have also been covering shorts in Nifty futures, signaling a broader shift in market sentiment.

The earlier accumulation of short positions contributed to a 6% decline in the Bank Nifty index, which fell from 57,701 on 7 September to 54,175 by 29 September. Since then, the index has rebounded, gaining 1.5% to 54,923 by the following Monday and rising further to 55,271 by Tuesday, reflecting ongoing buying interest. Updated futures position data for Tuesday was not available at the time of reporting.

S.K. Joshi, consultant at Khambatta Securities, noted that oversold conditions and an uptick in credit growth are also supporting the near-term rally in banking stocks. He pointed out that a rate hike can initially enhance banks’ net interest margins because loan rates, often tied to benchmark rates like the repo rate, adjust more quickly than deposit rates.

Swarup Mohanty, vice chairman and CEO of Mirae Asset Investment Managers (India) Pvt. Ltd., expressed a positive view on the banking sector, expecting no negative surprises from the MPC. He emphasized that domestic buying combined with continued FPI short covering will likely underpin gains. Mohanty highlighted that banks currently have ample liquidity, with FCNR(B) deposits amounting to $127 billion, just as credit growth begins to accelerate.

FPIs frequently utilize index futures not only for speculative bets but also for hedging their broader portfolios against volatility. By selling futures contracts, they can offset potential losses during turbulent periods marked by factors such as rising oil prices and a weakening Indian rupee.

At the end of September, FPIs held Indian equity assets valued at ₹66.17 trillion, with financial services constituting approximately ₹20 trillion or 30% of that total. The cumulative net short positions in index futures represented only about 0.8% of their overall portfolio, suggesting that futures hedges are a relatively small portion of their total investments.

Joshi remarked that hedging activity by FPIs remains modest compared to their entire holdings.

About the Author
Ram Sahgal serves as deputy editor at Mint and has over two decades of experience in business journalism. His career includes positions at The Intelligent Investor, Bombay Times, The Economic Times, and The New Indian Express. Ram has also worked briefly in the commodities exchange sector before returning to journalism. A liberal arts graduate from St Xavier’s College, Mumbai, he has covered diverse beats including markets, brokerages, derivatives, and regulations. When not tracking market trends, Ram enjoys train spotting and spending time with his mother at the cinema. He aspires to write a movie screenplay and remains passionate about analyzing market data and conversing with experts.