Stock traders skate on thin ice with huge long Nifty positions

India’s stockbrokers have probably been caught on the wrong leg. At a time when major U.S. stock indices are falling like nip sticks, most Indian traders, including retail and high-net-worth individuals (HNIs), currently hold the highest net-long positions in futures contracts in the Nifty index. for almost two years.

This simply means that a large number of retail and HNI traders in the derivatives segment are very vulnerable to the market shock in the coming weeks, experts said.

Position in Nifty futures

Nifty is India’s monopoly derivatives index, which is used for betting on future prices. Data from Indiacharts research shows that the long net position of domestic traders in Nifty futures on 10 June was 1.23 lakh contracts (was 1.32 lakh contracts on 9 June) and is the highest since Covid. lockdown in March 2020. On March 6, 2020, domestic traders had net long Nifty futures worth 1.44 lakh contracts.

Currently, foreign portfolio investors hold short positions in Nifty futures to a volume of one hundred thousand contacts.

Holding long positions means taking a bullish bet and the short positions are at odds with it. Each Nifty lot is valued at more than 7.5 lakh. According to QuantsApp data, the total open interest rate for Nifty futures on June 10 was 1.32 lakh contracts.

According to Indiacharts, FPIs are beneficial if markets fall while domestic investors are hit the hardest. There is a perception that those who have long net positions in the Nifty index may not be able to escape without large losses as global markets are already in a downward trend. In the US, major indices including the Dow Jones, S&P and Nasdaq fell between 3 percent and 6 percent in just two trading sessions last week.

“We are in a different time than Covids, and it may not be rewarding to hold long positions at the moment. In March 2020, those who continued to hold long positions in Nifty futures in the following months gained enormously since market regulator SEBI banned short selling.It led to a sharp market turnaround and recovery.Currently, it does not appear that SEBI can ban short selling.In addition, global central banks have begun to phase out the stimulus aggressively unlike under Covid when they extended it.So “Market liquidity will soon run dry, while inflation is already causing chaos. All of this is the recipe for further meltdown, and holding long-term positions is now like a death wish,” said Rohit Srivastava, chief strategist at Indiacharts.

Rupee at new low

Srivastava believes the market decline could continue at least in June and July, as the US Federal Reserve will announce two rate hikes of 50 basis points each, and if inflation is still not dampened yet another rise in August. In almost nine months, ever since the news that Russia increased its deployment of troops along the border with Ukraine, the FPIs have been selling stocks and index futures worth more than $ 25 billion in the secondary markets. On June 10, the rupee hit a lifetime low of 77.82 against the US dollar, indicating enormous market pressure.

Published on

June 12, 2022