With the Union budget for FY27 just about there, trading patterns in the derivatives market suggest that foreign investors are bracing for either a correction or a long spell of post-budget calm. Foreign portfolio investors (FPIs), who have prevailed over bullish retail investors by shorting the Indian markets since October 2024, are running into the budget in an extreme bearish mode for the second straight year.
Analysts said their positioning reflected expectations of either a market correction or a fall in volatility—flat markets—post the event. In either of these cases, the option premiums paid by the buyers would shrink, allowing the FPIs to pocket them. However, a market-friendly budget could result in massive short-covering that could give speed to any rally after the event.
In addition to selling in cash and futures, FPIs held net cumulative shorts of 132,312 index call option (Nifty and Bank Nifty) contracts. Sellers of calls expect either a correction or a fall in volatility post the event, which helps them retain premiums paid by call buyers, who are bullish ahead of an event.
Incidentally, ahead of the FY26 Budget on 1 February last year, FPIs were net short a cumulative 94,350 call contracts. On 31 January 2025, when they held these shorts, the Nifty 50 closed at 23,508.4 points, and on 1 February it hit an intraday low of 23,318.3 points, down 0.8%, before settling at 23,482.15 points. This helped FPIs gain on their call positions last year.
In the year before last, the budget for FY25 was presented on 23 July 2024 after the national election results about a month earlier. A day before that, FPIs were net long calls by 339,167 contracts. On 22 July 2024, the market had closed at 24,509.25, and the next day ended lower at 24,469.05, causing them to close out a large part of their positions due to mark-to-market losses. On that day, their cumulative net call was at a largely reduced 172,736 contracts.
However, unlike then, the global situation is much more volatile and corporate earnings growth remains tepid. For one, the India-US trade deal has been hanging fire since August last year and is weighing on sentiment, and the 575 companies that reported their third-quarter earnings through Thursday showed only an aggregate 0.8% sequential growth in net profit at ₹96,385 crore, per Capitaline.
“The positioning shows that FPIs expect a cooling off in volatility post the event, which will enable them to gain by retaining the options premium,” said Kruti Shah, quant analyst at Equirus.
Shah said that earlier this week, FPIs had sold a straddle—selling of a call and put option at the same strike—at 25,000 Nifty for ₹860 a share (65 shares make one contract), expiring on 24 February. This assumes a range of 24,140-25,860 for the current expiry month.
The Nifty settled two-fifths of a percent lower at 25,320.65 points on Friday. So long as the Nifty trades within this range, they make money. A breakdown or breakout can expose them to huge losses.
Jay Vora, analyst at IndiaCharts, said shorting by FPIs indicated they remain bearish on Indian markets. His range for the Nifty 50 is 24,700-25,700 points.
So far this calendar year, FPIs have sold cash shares worth ₹38,624.3 crore, after offloading ₹2.4 trillion in 2025. Though domestic institutional investors purchased shares worth ₹69,822 crore so far this year, after record buying of ₹7.9 trillion last year, markets have fallen because of global headwinds and lacklustre earnings growth.
The market tested a record high of 26,277.35 first on 27 September 2024. It took 14 months to hit a new record of 26,325.8 on 1 December, followed by another fresh life high of 26,373.2 on 5 January. From there, the Nifty ended 3.6% lower at 25,418.9 as of Thursday.
“The FPI positioning in index options and futures remains on the short side since quite some time. This, coupled along with cash selling, indicates a cautious stance by the FPI segment,” said Sahaj Agrawal, senior vice-president (research) at Kotak Securities.
For the short term, Agrawal expects any move above 25,500 to trigger buying interest or short covering. Sustenance would depend on broader developments: budget outcome and geopolitical developments. Support on the downside is seen at the 24,700 level.
Overall, FPIs are net long index puts and net short index calls, reinforcing a highly bearish stance.
