Foreign portfolio investors (FPIs) turned net buyers in India’s secondary cash market in July for the first time in five months, injecting ₹6,731.97 crore since the West Asia conflict broke out on 28 February.
Combined with ₹35,099 crore in purchases by domestic institutional investors (DIIs) and FPI short-covering of 83,297 Nifty and Bank Nifty futures contracts, the buying spree pushed the Nifty up 2.17% month-on-month to close July at 24,383.60, according to exchange and depository data. Short covering refers to traders closing out bearish derivatives positions by buying them back.
Analysts expect stronger foreign cash inflows and further short-covering in index futures to power a rally back toward pre-war levels of 25,178.65, provided geopolitical tensions cool and, to a lesser extent, if the global AI trade continues to unwind. However, any escalation in the West Asia conflict could upset that forecast, they warned.
"The dampening of the AI trade and rising prospects of peace in war-torn West Asia have led to a slight recovery in FPI cash market inflows," said Kruti Shah, quant analyst at Equirus Securities. "If the geopolitical situation eases, we could break out of the 23,000-24,000 range the market has been stuck in since the war began, and head to the pre-war 25,000 level. If it gets worse from here, all bets will be off the table," she added.
On 27 February, the day before the war broke out, the Nifty closed at 25,178.65. It has yet to reclaim that peak.
Even though Brent crude surged 24% to $90.12 a barrel in July amid renewed US-Iran fighting, hopes are growing for a resolution that could drag prices back toward their pre-war level of $72.48 seen on 28 February. To be sure, Brent tumbled 7.5% intraday on Monday from Friday's close after the US held back weekend strikes, as diplomatic efforts through interlocutors resumed to fully reopen the Strait of Hormuz.
AI trade unwinds
The unwinding of the AI trade has hit tech-heavy indices hard, with South Korea’s Kospi dropping 22% month-on-month through the end of July, Taiwan’s Taiex falling 13%, and the Nasdaq slipping 3.2% as June-quarter earnings missed expectations.
"The continued easing of crude prices and the possibility of increased rotation of funds from South Korea and Taiwan to India by global emerging-market funds could support a Nifty rally to its pre-war level," said Sudhir Joshi, consultant at Khambatta Securities. "The disclaimer is that if hostilities resume, we may not see this playing out."
While FPIs have sold a net ₹2.87 trillion so far this calendar year, according to National Securities and Depository Ltd (NSDL) data, domestic institutions, led by mutual funds, have net purchased ₹5.05 trillion shares over the same period, per BSE. However, DII buying slowed to ₹35,099.25 crore in July from ₹85,800.14 crore in June owing to some profit booking, Joshi added. As of Friday, FPIs held cumulative net short index futures positions of 173,113 contracts, down from 256,410 contracts at the end of June.