FIIs Switch to Bullish Bets on Nifty Futures

Turn net buyers for the first time in 5 months as falling gold & crude prices fuel hopes of lower CAD

Stock buying by foreign institutional investors may have reduced to a trickle this month, but they have become net buyers of index derivatives for the first time in five months, indicating a change in sentiment following a correction in commodity prices, which helps soften inflation and narrow the country's current account deficit (CAD). 

These investors are considered the mainstay of Indian markets as they have been buying shares at a time domestic institutions and retail investors have sold equities to cut their losses. To hedge their cash market purchases, FIIs tend to net sell derivatives, normally index futures. This has been the case since December last year and the trend continued till mid-April. 
However, a steep fall in gold and Brent crude prices, two of India's major imports, during mid-April caused them to trim their bearish bets and become net buyers instead. On April 15, they were net sellers to the extent of . 4,324 crore in Nifty futures. As of Monday, their outstanding bets stood at a positive . 4,723 crore. Cash market purchases stood at . 4,785 crore against an average of over . 16,000 crore in the eight months through March. 
"FIIs, who built bearish bets on Nifty index futures so far this year, have covered these bets since April 15, after gold and crude started correcting," said Yogesh Radke, head, quantitative research, Edelweiss. 
"The rapid change in their bets from bearish to bullish is predicated on hopes the recent rationalisation in commodity prices would help narrow the current account deficit and strengthen the rupee, which, bodes well for them." 
Oil and gold imports were among the main reasons for India's CAD widening to a record 6.7% of GDP in the December quarter. But, derivatives analysts warn that a hardening of prices and hawkish comments from RBI could queer the pitch once again and cause FIIs to unwind bullish bets. "If crude and gold prices start looking up again, which cannot be ruled out, we could see FIIs unwinding bullish bets," said Krutiik Shah, derivatives analyst, Destimoney Securities. 
Markets have discounted a 25-basispoint rate cut at RBI's May 3 policy meet, especially after inflation rose at its slowest pace in 40 months to 5.96% in March. However, experts such as Ridham Desai, MD, Morgan Stanley India, expect a less than 50% chance of RBI cutting rates in May as macro-stability indicators like retail inflation and CAD still remain high. Radke, too, expects unwinding of long index futures bets if the RBI comes out with hawkish comments at its policy meet. 
Commenting on inflation in the Asian region, IMF recently said unlike across much of the region, headline inflation slowed markedly through 2012, but "notable exceptions were India and Indonesia". It reportedly added that in India's monetary policy could best support growth by putting inflation on a clear downward trend.