FIIs Begin to Build Fresh Positions in Stock Futures

Open interest in stock futures of Bhel, Dr Reddy's, Cairn, CESC and Bata India have seen a surge

Foreign investors are selectively building long positions in single stock futures, reversing a portion of their recent bearish bets, as they deem the fall of late in some of these stocks as excessive, said analysts. Though Sebi does not provide data on foreign institutional activity in individual stock contracts, analysts said many stock futures whose open interest have risen of late, have seen a fresh build-up of long positions, especially by overseas investors. Open interest in stock futures of Bhel, Dr Reddy's, Cairn, CESC and Bata India among some others have seen a surge in the past few trading sessions. 

"When some stocks fall sharply, sellers begin to cover their short positions on perceptions they won't fall further as their intrinsic value exceeds their current market price, making them attractive to own," said Karun Mutha, senior VP & head equity and derivatives advisory, HSBC InvestDirect Securities. "At this level it is possible that small hedge funds will start initiating fresh long positions in such stocks." 

The Nifty has corrected by 12.5% from its high of 5609 three months ago to 4906.05 on a combination of domestic and global factors such as high current account deficit, falling currency and a flight to the dollar because of the euro crisis. This has spooked foreign investors who net sold shares worth . 1,109 crore in April after pumping . 43,950 crore into Indian equities during the preceding three months. 

Brokers said many stocks' valuations were attractive with Nifty at 4800. They think the market is unlikely to break below that level, as most of the negatives are already priced in, prompting foreign institutional investors (FIIs) to build long positions in some stock futures. 

"It's a good indication.....it shows they (FIIs) believe that prices have bottomed out and may not fall below current levels," said Utpal Choudhury, head of research, Dalmia Securities. Data shows FII purchases in single stock futures have been more than sales since last Tuesday amid an increase in their outstanding positions at the end of the day. 

TS Harihar, head - institutional derivatives, ICICI Securities, does not view the small buys by some FIIs as a harbinger of better times. "I'd rather wait till the build up gets substantially higher," he said.