Foreign investors turned increasingly bearish ahead of the RBI Monetary Policy on February 7, aggressively shorting index call options while continuing heavy cash market selling.
Foreign Portfolio Investors (FPIs) have positioned themselves defensively following the Union Budget 2025, signaling heightened bearish sentiment in Indian markets. The shift in investment strategy comes as global trade tensions escalate, and concerns over domestic policy decisions grow. Despite remaining largely inactive during the special budget session on February 1, FPIs took a highly defensive stance in the derivatives market, significantly increasing their short positions on index options and futures. With the monetary policy review scheduled for February 7 and global trade uncertainties rising, analysts suggest that FPIs are preparing for potential market corrections. This article delves into the data-driven insights behind their cautious stance.
Bearish Stance Pre-Budget
Ahead of the Union Budget 2025, FPIs took an unusually pessimistic position, net selling index call options—a rare move indicating expectations of a market downturn or stagnation. On February 2, FPIs increased their net short positions in Nifty and Bank Nifty call options to 99,661 contracts, up from 94,350 contracts a day earlier, according to National Stock Exchange (NSE) data.
Typically, FPIs use index call options as a hedge against their short index futures positions. However, their decision to aggressively short call options, rather than go long, signals excessive bearish sentiment. This move was accompanied by continued selling in the cash market and shorting of index futures, reinforcing their defensive stance.
Read More: Budget 2025: Everything You Need To Know
Massive FPI Outflows and Shorting Activity
Since October 2024, FPIs have been consistent net sellers in the Indian equity markets, offloading ₹2.38 trillion worth of shares by January-end 2025. This exodus, combined with rising derivative short positions, suggests growing concerns over domestic and global market stability.
– Index Call Option Shorting: 99,661 contracts as of February 2, up from 94,350 on February 1.
– Cash Market Sell-Off: FPIs have cumulatively sold ₹2.38 trillion in equities since October 2024.
– Short Index Futures Positions: Increased significantly, indicating expectations of a prolonged downturn.
The bearish trend aligns with global economic risks, including escalating trade tensions between the United States and Canada, as well as uncertainty over India’s upcoming monetary policy review on February 7.
Read More: US-Canada Trade War Begins: Here’s All You Need To Know
Sectors Most Affected by FPI Outflows
1. Banking & Financials – FPIs hold significant stakes in Indian banks and NBFCs. A prolonged bearish stance could lead to sharp corrections in financial stocks, impacting market sentiment.
2. IT & Tech – Given global trade uncertainties and slowing global IT spending, the technology sector could face additional pressure.
3. Infrastructure & Capex-Linked Stocks – Despite the budget’s long-term focus on growth, the lack of immediate capex-driven stimulus may result in short-term selling pressure.
Conversely, domestic institutions and retail investors could find buying opportunities in sectors with strong fundamentals, such as pharmaceuticals, consumer goods, and renewable energy, which remain resilient to external shocks.
Also Read: Union Budget 2025: Know What Gets Cheaper, What Gets Costlier
All-in-All
Foreign investors have adopted an overwhelmingly bearish stance following the Union Budget 2025, with record short positions in index call options, continued cash market sell-offs, and heightened caution ahead of global trade risks. However, this period of volatility also presents opportunities for domestic investors to navigate market dips strategically.
As the dust settles post-budget, the focus will shift to global trade developments, the RBI’s policy decision, and upcoming economic data.