A rebound in Indian stocks may be on the horizon after foreign investors’ bearish bets reached extreme levels on Wednesday, a day ahead of a smart recovery underscored by investor belief that US-India tariff tensions could abate following news of a possible Putin–Trump meeting next week.
The benchmark Nifty 50 index on Thursday recovered from a low of 24,344.15 to close up a tenth of a percent at 24,596.15 in the last two hours of trading, data from the National Stock Exchange (NSE) shows.
“Markets believe that growing chances of a peace deal in Ukraine could ease the US-India tariff tensions, which is why they probably recovered on Thursday,” said Ashish Gupta, CIO, Axis MF. “I would wait and see how the situation evolves before forming a view on a sustainable recovery.”
FPIs cut their Nifty and Bank Nifty long-short ratio to 8.58% on Wednesday to hedge their $822-billion India portfolio of Indian stocks, anticipating steeper US tariffs. This means out of every 100 open positions, less than nine are long and the rest are short. If the markets fall, these short futures position cushion the value erosion in FPI portfolios. In addition to these shorts, FPIs are net short index call options and long index put options.
To be sure, the record low long-short ratio of 7.75% happened on 22 March 2023, due to a sharp hike in interest rate by the US Fed at the time, and the shrinking spread between the US 10-year and Indian 10-year bonds.
According to Jai Vora, research analyst at analytics firm IndiaCharts, FPIs are “displaying abundant caution” by taking short positions in index futures and call options, and buying put options. “Anecdotally, we get a short covering rally after such extreme bearish positions created by FPIs,” said Vora. “We are hopeful this could happen after seeing the sharp recovery in markets on Thursday.”
FPIs equity assets under custody fell from $930 billion as of September-end 2024 to $821 billion as of end-July 2025, per data from National Securities and Depository Ltd (NSDL). During this period, the Nifty 50 has fallen 6.4% from a record high of 26,277.35 on 27 September to Thursday’s closing of 24,596.15.
Interestingly, the fall in asset value is attributable to correction in share prices rather than massive selling by the FPIs. NSDL data shows that of the $108.5 billion erosion in asset value, 31% or $33.65 billion was on account of selling, the rest being contributed by a fall in share prices.
To protect their portfolios, FPIs sell index futures and, at times, call options and buy put options as they have done this time around. However, when the shorts are extreme, a sliver of good news can result in these shorts being covered, as markets anticipate on Friday.
Sriram Velayudhan, senior vice-president at IIFL Capital Services, said that the strong “support cluster” of 24,450-24,600 has held consistently over the past few months, the latest being after the initial imposition of 25% tariffs by US President Donald Trump.
Buying by DIIs (domestic institutional investors) and extreme shorting by FPIs add to the possibility of a nascent recovery in the market to initially 24600-800 and if broken to 25200, he added.
While FPIs have sold shares worth $31 billion ( ₹.88 trillion) from October to July, DIIs have purchased shares worth ₹6.65 trillion over the same period.
US president Trump on Wednesday announced an additional 25% tariff on Indian goods’ imports, attributing it to Indian imports of Russian oil, which he said was fuelling the Ukraine war. India has termed the US action as unjustified and unfair.
A 25% tariff was earlier imposed on 31 July and came into effect at midnight, Thursday. With Trump’s latest executive order, an additional 25% tariff on Indian goods is slated to kick in by 27 August, taking the overall tariff to a crushing 50%.
