Big market shift: FPIs convert futures to cash shares

The last Tuesday of every month sees Nifty futures and options (F&Os) and stock F&Os being rolled over or allowed to expire.

Around 122,914 stock futures contracts were closed out by FPIs on the expiry day, leaving them with 1.27 million stock futures contracts versus 1.393 million a day earlier, as shown by data from NSE.

This meant these futures were converted into delivery, resulting in the inflated buying figure on the stock exchange.

There were no large block deals, except for one worth ₹819 crore by Aditya Birla Capital, leaving around ₹9,500 crore of the FPI buying figure unexplained. Even the Nifty 50 ended lower by a tenth of a per cent to 25,936.2 despite the huge provisional buying figure.

Stock deliveries

But, a closer look at the stock futures open interest positions at the end of the October series shows that FPIs, who had net purchased stock futures, exercised some of these by allowing the futures to expire and opting to take delivery of the underlying cash stocks.

Stock derivatives are compulsory delivery. This means that on expiry, if a client has a buy or sell futures or options position left open, they are obliged to take or give delivery of the underlying share.

FPIs holding large stock futures positions kept these open, resulting in them having to take delivery of the cash shares while simultaneously closing out futures contracts that were exercised.

According to Kruti Shah, a quant analyst at Equirus, and Rajesh Palviya, head of research at Axis Securities, FPIs allowed the futures to expire, resulting in them having to take delivery of the underlying shares, concomitantly giving rise to the bloated figure of ₹10,339.8 crore.

To trade stock futures, a client must put up a margin, which is a fraction of the cost of the underlying stock. When exercising these options, the client must pay the full amount for these shares.

“This explains why stock futures outstanding positions have reduced by 122,914 contracts on a net basis at Tuesday’s monthly expiry,” said Palviya. “They were allowed to expire, and cash shares were purchased for the whole amount.”

Bullish on India

One of the reasons for allowing the futures to be converted to delivery is FPIs turning positive on the demand recovery in rural and urban India after the goods and services tax (GST) rate rationalization and the transmission of the Reserve Bank of India (RBI) interest rate cut of 100 basis points between February and May. This will help improve corporate earnings and result in stocks regaining mojo, explained Palviya.

The stock market has been consolidating since 27 September 2024, when the Nifty 50 reached a high of 26,277.35, only to decline 17% to a multi-month low of 21,743.65 on 7 April, due to global trade tensions and poor earnings growth.

From there, the Nifty has recovered 20% to trade at 25,936.2 on Tuesday. This is giving FPIs hope that Indian markets could hit a new high later this year, Palviya added.

They have turned buyers of cash stocks of ₹8,155 crore for the first time in four months.