FPIs struggle to shake off fears, bearish bets hit four-month high

Overseas Investors' Flight: A Four-Month High in Nifty & Bank Nifty Sell Positions

Global trade tensions and disappointing domestic earnings have fueled a surge in overseas investors' sell positions on Nifty and Bank Nifty index futures, reaching a four-month high. Analysts attribute this cautious stance to a confluence of factors impacting the Indian market.

Record Sell-Off: Foreign portfolio investors (FPIs) held a net short position of 121,820 contracts on Tuesday, the highest since March 19th, according to IndiaCharts. This represents a significant increase in hedging against potential market declines.

• Massive FPI Holdings: As of June 30th, FPIs controlled ₹74.18 trillion in Indian equity assets, dwarfing the ₹32.69 trillion held by domestic mutual funds (NSDL and AMFI data).
• Earnings Disappointment: While FY26 Nifty earnings per share (EPS) growth is projected at 11%, the FY27 forecast has been slashed to 15.5% from an initial 22%. This, coupled with high valuations relative to growth expectations, is driving caution among FPIs (Kotak Securities).
• High Valuations: Based on a FY25 EPS of ₹1,013, Nifty's price-to-earnings (P/E) multiple of 25 surpasses both the five-year (24.23) and three-year (22.46) averages (Bloomberg data).

Cash Market Selloff: The bearish sentiment extends to the cash market, with FPIs offloading shares worth ₹1.07 trillion through July 15th (NSDL data). This contrasts sharply with domestic institutional investors (DIIs) net purchases of ₹3.74 trillion.

US Inflation & Interest Rates: Fears of rising US inflation and subsequent increases in bond yields are creating headwinds. This could curb further rate cuts, strengthen the dollar, and trigger further FPI outflows from emerging markets, including India (Kotak Securities).

Slowing Growth & Trade War Fears: Tepid Nifty earnings growth (6.4% to ₹1,013 per share in FY25) and a downward revision in FY27 EPS estimates (from ₹1,370 to ₹1,300) reflect concerns over slowing private capex and the lingering impact of the global trade war (Khambatta Securities).

US-EU Tariff War: The recent imposition of a 30% tariff on EU goods by the US is exacerbating inflationary pressures. June's inflation spike to 2.7% highlights the impact of tariffs on consumer prices.

Emerging Market Outperformance: India's relative underperformance against other emerging markets is another contributing factor. While MSCI India's gross return stands at 6.55% (year-to-date), MSCI Emerging Markets boasts a 15.57% return. Markets like Taiwan and Korea are exhibiting significantly higher earnings growth (Axis Mutual Fund).

Market Volatility: The Indian stock market has experienced significant volatility, plunging 17% from its September peak before recovering somewhat, only to fall again amidst growing concerns.