Peak bearish bets signal turbulent week for market

FPIs increased their net cumulative bearish bets on Nifty and Bank Nifty futures to 186,063 contracts on Friday, crossing the previous record shorting of 174,105 contracts on 24 February last year, as per Rohit Srivastava, founder of analytics firm IndiaCharts.

Meanwhile, proprietary traders—brokers who trade for themselves—raised cumulative net sales of index call options to 116,680 contracts and ratcheted up cumulative index put option purchases to 198,367 contracts on Friday.

While increased selling of index futures signals bearish sentiment, selling of call options and buying of put options indicate volatility ahead.

“Under normal circumstances, record high shorting by FPIs would have raised hopes of short covering bounces, but that premise has broken down since April last year, when FPIs have maintained shorts on index futures despite the market recovering from the low to hit a fresh high this month,” said Srivastava.

The US court verdict, expected this week, will either cement Trump’s trade leverage or bring relief for shipments to the US, India’s largest export market. The court on Friday deferred its ruling to 14 January, creating the spectre of added uncertainty in a market that has struggled to trade above its recent record high.

The benchmark Nifty has rallied 21% from a 52-week low of 21743.65 on 7 April last year through a record high of 26373.2 last Monday due to massive buying from domestic institutional investors led by mutual funds. However, the Nifty could not sustain gains as FPIs continued to sell, falling 2.6% to 25683.3 on Friday. The market is likely to trade over a 1.5% range from 25500-25900 through Tuesday, options data indicated.

Domestic institutions have net-purchased shares worth ₹6.17 trillion in the fiscal year through Friday against FPI selling of ₹1.22 trillion through Thursday, exchange and depository data showed.

Why FPIs are negative

Better returns in the US and a sharp depreciation of the rupee have turned FPIs risk-averse to emerging markets like India, where valuations relative to earnings have also deterred investment, analysts said. Data from global index provider MSCI shows that MSCI India index generated a gross return of a mere 4.29% over a year through December 2025, against the MSCI US index returning 17.75% over the same period.

Besides, the 4.73% rise in the dollar versus the rupee, which closed at 90.16 a dollar on Friday, has diminished the dollar returns for foreign investors from India.

“The trade deal apart, FPIs are getting more attractive risk-free returns from investing in the US rather than in risky emerging market assets,” said Sudhir Joshi, a consultant at Khambatta Securities. “The rupee’s fall is a further spoiler for them when the spread between the US and India 10-year bond yield is compressed.”

Still, the steady inflows from retail investors may prevent a crash.

“There is a structural change, with almost ₹30,000 crore coming into mutual funds every month through the SIP route (systematic investment plan), which obviates an outsized correction,” said Swarup Mohanty, vice-chairman, Mirae Asset Investment Managers.

Mohanty, however, added that investors must get used to a moderation of returns from those seen in the four years after the pandemic, when the Nifty more than tripled from a multi-year low of 7511.1 on 24 March 2020 to a high of 26277.35 on 27 September 2024.

“From 2000 to 2020, the Nifty tended to double over a five to six-year period, which changed in the three to four years post the pandemic, when the benchmark more than tripled. My belief is that we will see a mean revision in returns to the pre-pandemic period rather than the aberration we saw in the post-covid years. I think investors should attune themselves to moderating their pace of return expectations,” Mohanty said.

He added that 2026 would be the year for midcap outperformance in sectors such as healthcare, chemicals and capital market-related themes.