FIIs Stay with their Bearish Positions as Clouds Gather Indices end marginally lower; open interest dips 8% from the last expiry, indicating nervousness

 Foreign investors carried forward bearish positions to the April futures and options series on expiry of the March contracts amid worries companies' earnings in the January-March quarter could disappoint and the central bank might not cut policy rates. Retail and rich traders unwound their long positions in March at a loss, but did not initiate fresh shorts in the next series. 

The market-wide rollover in December futures to January was 79%, almost in line with the previous expiry, according to provisional data. Rollover in the most-actively-traded Nifty March futures to April was at 58%, as against 65% during the previous expiry. Bank Nifty futures witnessed 65% rollover, falling from about 71% during last expiry. 

"Unlike FIIs who built up shorts and rolled over their bets, many retail and high net-worth individuals booked losses and squared off their futures positions," said Siddarth Bhamre, head - equity derivatives at Angel Broking. 

Sectors such as capital goods, infrastructure and sugar witnessed strong rollovers. However, banks and information technology firms saw weak rollover, especially in large-cap scrips, said Amit Gupta, head - derivatives, ICICI Securities. The Nifty index declined 0.3% on Thursday to close at 5178.85 points. The index has fallen over 5.5% since February 23, the last derivatives expiry, when it had closed at 5,483.30 points. Open interest, or the number of outstanding contracts, dipped 8% from the last expiry, indicating nervousness among investors, said analysts. 

"During the last rollover, we saw the momentum in the market was intact and rollover of Nifty futures was strong despite a high premium. This time, the premium is similar, but people are very jittery about the month ahead," Gupta said. 

The nervous undertone was also reflected in the weak rollover of contracts in sectors like banking. SBI futures witnessed 65% rollovers, and HDFC Bank saw 57% positions being rolled over, both fell short of their average of 70-75%, according to Gupta. 

Bank shares are likely to be the most affected by changes in RBI's policy, due to be announced on April 17. RBI's unwillingness to pare policy rates and the government's heavy borrowing schedule are expected to push up bond yields, affecting their value on banks' books. "Domestic derivatives investors seem to prefer staying on the ringside in April, with rising crude prices and falling rupee adding to the fiscal deficit," Bhamre of Angel Broking said. "The government's handicap with reform measures is taking its toll," he added. 

Benchmark indices ended marginally lower on Thursday, erasing most of the early losses as traders covered short positions after the India's infrastructure output growth in February jumped to 6.8% from a year ago, against 0.5% in January. Foreign investors net sold shares worth . 1,333 crore on Thursday. 

Traders sold shares in the capital goods, information technology and consumer goods sectors and covered shorts in healthcare, consumer durables, autos and metals. Of the 2,914 shares traded on BSE, 1,539 advanced while 1,270 declined. Indian markets, which were the best performers since January, shed around 6% since the Budget on March 16 as the government's proposal to tax Vodafone-like deals retrospectively raised fears that overseas sales of shares deriving value from India would not be exempt from capital gains tax. 

However,according to market analysts, the recent market correction has made valuations attractive and, with the government clarifying its stance on the General Anti-Avoidance Rules (GAAR), FII inflows could once again retest the robust levels in the calendar year through February. Against net inflows of . 36,298 crore in the first two months of 2012, foreign investors pumped in a mere . 2,075 crore in March. 

DK Agrawal, CMD, SMC Investors & Advisors, said the current Sensex valuation, at 13.6 times FY13 earnings, is "very attractive" as historically, long-term investment at these levels have given handsome returns. "I feel that FII selling is a short-term phenomenon and they will return as, normally, those who invest at current PE have seen shares bouncing back," he said . 

Dinesh Thakkar, CMD, Angel Broking, said with Nifty trading near its bottom of 5150, FIIs would return as the long-term fundamentals of the economy were still "sound". "With the FM's admission that the government is comfortable with 6% inflation, chances are that the RBI will cut interest rates, if not in April, in the next policy. I think this will once again lure FIIs into the market," said Thakkar.