India-US deal triggers FPI short covering, but reversal not yet in sight
FPIs are holding on to significant short positions on Nifty and Bank Nifty derivatives, which they are unlikely to close out until specifics of the US-India trade deal emerge, believe analysts.
New Delhi: Foreign portfolio investors (FPIs), who have been betting against Indian markets since October 2024, were forced to cover nearly two-fifths of their bearish derivatives positions on Tuesday after the announcement of an India-US trade deal.
Analysts expect the short covering to continue in the near term. But a full exit from bearish bets, and a shift to positive positioning, is unlikely until the specifics of the deal are known. Broader geopolitical risks, including tensions with Iran and concerns around an artificial intelligence (AI) bubble, could also weigh on sentiment, they added.
FPIs cut their cumulative net bearish positions in futures and options on the Nifty and Bank Nifty by 39% to 542,299 contracts on Tuesday, from a record 887,479 contracts on Sunday. The move followed news late on Monday that the US would cut tariffs on Indian imports to 18% from 50%.
Indian markets remained open on Sunday for the Union budget presentation.
This short covering helped push the Nifty up 2.5% to 25,727.55 on Tuesday. FPIs also made provisional cash purchases of ₹5,236 crore, adding to the rally. Even after the unwinding, FPIs continued to hold large bearish positions, accounting for 61% of outstanding index derivatives positions at Tuesday’s close.
At 2pm, the Nifty traded 40 points higher at 25,768.
Trade-deal fallout
“FPI short covering and cash-based buying could continue in the short term, owing to the trade deal announcement. However, they would calibrate their stance based on the news flows, not just on the deal, but on other developments related to geopolitics and issues like AI, which remains an overhang on Indian IT sector," said Sahaj Agrawal, senior vice president (research) at Kotak Securities. “That said, I think the markets remain in a consolidation phase within a 25400-26000 range, for now."
Kruti Shah, quant analyst at Equirus Securities, expects markets to consolidate in a 25500-26000 range until the specifics of the deal are known.
Caution was also visible in weekly options activity.
Traders sold 87 puts for every 100 calls sold intraday around noon Wednesday on options expiring next Tuesday. The heavier selling of calls relative to puts signalled a cautious stance among players such as FPIs, Shah said.
Traders tend to sell more calls than puts when they expect markets to correct or move sideways, allowing them to retain the premiums paid by call buyers.
FPIs sold shares worth ₹2.5 trillion in 2025, contributing to a slide in the market from 23645 at the end of December 2024 to 21,743.65 on 7 April 2025. Since then, the market has recovered to a fresh high of 26,373.2 on 5 January 2026, helped by ₹7.8 trillion of share purchases by domestic institutional investors during the period.
Despite the recovery, Indian equities have underperformed emerging markets due to sustained FPI selling. MSCI data show MSCI India generated a gross return of 4.29% last year, compared with a 35% return from MSCI Emerging Markets, reflecting a falling rupee and lacklustre earnings growth.
A trade deal with the US could change that, Motilal Oswal Financial Services Ltd said.
"With the fog of uncertainty now being lifted, we believe that multiple positives will accrue in the form of 1) reversal of FII outflows, 2) INR recovering its lost ground, 3) general improvement in sentiments towards Indian equities, 4) return of confidence for FDI, and 5) retracement of India’s underperformance vs. EM peers, etc.," said the financial services firm in its India Strategy note after the announcement of the trade deal.
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