The FPI short-covering resulted in the Nifty successfully staying above a key retracement level of 19,367 for a second day on Tuesday; the market closed at 19,406.70, 78 points above the day’s low, which is seen as a positive sign in the markets.

FPIs pruned their cumulative index net shorts to 147,370 contracts on 6 November from 2 November’s 175,698 contracts, second only to the record bearish position of 196,378 contracts on 22 March when the market closed at 17,152. FPIs exert significant influence on market movements, based on their positions in the cash and futures markets.

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From 22 March, FPIs began covering their short positions, turning net long by 62,030 contracts on 15 September, which was one of the reasons for the market surging to a record 20,222.45 that day from its 52-week low of 16,828 on 20 March. To be sure, their cash purchases of ₹1.69 trillion during March-August also fuelled the rally from the low.

They then began unwinding longs and raised bearish bets on cash and index futures, causing the market to plunge from the record high of 20,222.45 to a low of 18,838 on 26 October. Thereafter, they pruned their negative futures bets on 3 November and on 6 November, which aided the rebound. Data for 7 November was unavailable until press time, but market experts expect the short-covering to continue, fuelling the corrective rally.

Interestingly, they also turned buyers in cash of ₹359.87 crore on 6 November, coinciding with their reduction in futures short positions. They have remained sellers of shares worth ₹42,454 crore from 1 September to 5 November.

“There are many moving parts to FII inflows into EMs, two of them being US bond yields and dollar, which until now were negative for EMs, but have eased after the perceptibly dovish Fed policy on 1 November,” said Jyotivardhan Jaipuria, founder of PMS firm Valentis Advisors. “We’d probably see more of them covering their shorts in the derivatives market which along with domestic buying could prop up the markets by another 1.5–2% in the very near term.”

Agreed Rajesh Palviya, derivatives head at Axis Securities. “Today’s (7 November) closing is very positive as the market closed above the key 38.2% retracement level and could now test the 61.8% level which could take it to 19,650-19,700, aided by further FPI short covering.”

The US bond yield, which hit a 16-year high of 5% on 23 October, corrected to 4.59% currently, while the dollar index that measures the strength of the greenback against six major currencies, has fallen from 106.88 on 1 November, after the US Federal Reserve kept a pause on interest rates for a second time since September, to 105.59 intraday 7 November.

While FPIs have net sold index futures, retail and high net-worth individuals (HNIs), proprietary traders, and domestic institutional investors (DIIs) are net buyers.

Foreign investors borrow cheaper in the US to invest in higher yielding and riskier EM assets.

When bond yields there spike , they pull money out of EMs to invest back in US bonds and the dollar.

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Updated: 08 Nov 2023, 12:00 AM IST