FIIs turn bullish on Indian equities as hopes of fiscal stimulus rise

For the first time since Jan 21, total short positions by foreign investors in the futures contracts of Nifty 50 fell below their total long positions on the benchmark on Tuesday.

The net short positions have declined from 173,133 contracts on Mar 6, the highest since the global financial crisis, to net long of 13,750 contracts on Wednesday, data available on the National Stock Exchange showed. The recent decline in short positions of foreign investors on the Nifty 50 is commensurate with an increase in their long positions on the index. At the same time, the bout of short covering has also followed a decline in the intensity of their selling in the cash segment of the market.

While foreign investors appear to have turned positive on Indian equities in the futures segment, analysts cautioned that the real sign of turnaround will come only when they turn net buyers in the cash segment as well. So far in March, foreign portfolio investors have net sold local equities worth over $7 bln as they turned averse to holding equities worldwide on the rising prospects of a global recession triggered by the coronavirus pandemic. The long positions of foreign institutional investors, as a percentage of the total long positions on the Nifty 50, has steadily increased from merely 12% on Feb 28 to 53% on Wednesday, indicating that the index may see an intermediate bounce in the coming sessions as global cues also turn positive, said derivative analysts.

In September, when foreign investors turned net long on the Nifty 50 futures contracts, it resulted in net inflows of $8 bln in the subsequent four months, aided by the boost to equities from a sharp cut in corporate tax rate by the government. In the previous two sessions, the benchmark indices have bounced nearly 9% from their multi-year lows hit on Monday as global markets picked-up steam aided by announcements of large stimulus packages by governments in advanced economies to tackle the economic impact from the coronavirus pandemic. The US is on the brink of announcing a near $2-trln fiscal package, while Germany is mulling a 500 bln euro fiscal plan.

The actions by governments in developed countries that are affected by the pandemic follow a synchronised easing of monetary policies. Analysts believe with the US Federal Reserve opening up the liquidity tap indefinitely, and back home, market participants expecting the Reserve Bank of India to slash policy rates substantially and widen the surplus liquidity in the system--a strong argument can be made for an intermediate rally in equities. However, investors, left shell-shocked by the near 33% dive in benchmark indices from the record highs hit in late January, remain sceptical that the worst is behind in this bear market triggered by the rapid spread of a viral infection.

Coronavirus, termed by many as a "black swan" event for global markets, has brought the entire world on its knees as countries are locking down cities and major industrial hubs to contain its spread, which has taken nearly 18,000 lives and left close to 500,000 people infected. India, itself, on Tuesday announced a 21-day nationwide lockdown to contain the spread of the virus in a move that some economists believe will result in a likely contraction in the economy over the next two quarters. With the global economy expected to enter a deep recession in March and June quarters, money managers believe equities may see one more round of selling before forming the much-eyed bottom.

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