The Nifty 50 is caught in a tug of war between domestic investors betting on a rebound and foreign portfolio investors (FPIs) positioning for a fall, with the index hovering near a key support level of 23,606.
A decisive break below this level, hit on 24 July, could send the Nifty towards its 8 June low of 23,070 and potentially lower, analysts said.
On Tuesday, the Nifty declined 144.05 points, or 0.61%, to end at 23,635.10.
Against this backdrop, retail and high-net-worth investors (HNIs) held a record 1.48 million net long index positions on 7 September. FPIs, in contrast, held 1.18 million net short positions, according to Rohit Srivastava, founder of analytics firm IndiaCharts.
FPIs’ net short positions had reached a record 1.2 million on 3 September, IndiaCharts data showed. Net index positions combine the index futures and options positions held by the two investor groups.
FPIs are net short Nifty and Bank Nifty futures, net long index put options and net short index call options, signalling a bearish bias. Retail and HNI investors, on the other hand, are net long index futures and call options and net short index puts, indicating a bullish view.
“Right now, the challenge for our market is weathering the fallout from rising crude, induced by reignited hostilities in West Asia. Though US benchmark bond yields have risen above the historic 4.7%, the Fed action to cool off rising yields, thanks to higher crude, should have a salutary impact on them. The third challenge of the falling rupee has been addressed by the FCNR (B) deposit inflow of $127 billion,” said IndiaCharts' Srivastava.
“If the external situation worsens we could face more headwinds, but if crude moderates, the market will respect the 23,600 support and could head higher toward 24,800, which I am a votary of,” added Srivastava.
The external backdrop has become less favourable for Indian equities. Brent crude has risen 11% over the past month through 7 September to $97 a barrel, while the US 10-year Treasury yield has climbed 10 basis points to 4.79%, according to Investing.com.
Over the same period, the Nifty has fallen 3.27% to 23,779.15, according to exchange data.
According to Shai Coelho, founder of market analytics firm Vtrender, rising US yields amid higher crude prices tend to trigger outflows of short-term foreign capital, adding to market volatility.
Coelho, however, added that he expects the so-called “Taco trade” to kick in, as it has in the recent past when yields “threatened to rise”. The TACO trade was evident on 8 April, when the Nifty rallied 3.77% to 23,997, a day after US President Donald Trump announced a ceasefire just hours before a deadline for bombing Iran was due to expire.
FPIs have sold ₹15,116 crore of Indian cash equities so far this month, after turning net buyers to the tune of ₹24,098 crore over the previous two months.
Meanwhile, Kruti Shah, quant analyst at Equirus Securities, said she had recommended a 24,000 straddle to institutional clients for the Nifty derivatives expiry on 29 September. The strategy involves buying both a call and a put option at the 24,000 strike, effectively positioning for a sharp move in either direction.