MUMBAI: The failure of US-Iran talks in Islamabad to resolve the war threatens last week’s market rebound, with traders bracing for a volatile Monday session as weekly Nifty options expire.
"This is bad news… (it) puts at risk last week's recovery," said Nirmal Jain, founder of IIFL Group, on the likely impact of the failed talks between the warring sides.
Analysts said foreign portfolio investor (FPI) positioning in derivatives will likely drive near-term market direction, after last week’s rally was powered largely by short-covering tied to optimism around a ceasefire.
Jain said foreign investors, who have been selling India through the equity cash and derivatives markets, could step up their bearish build-up after last week's short-covering. Amid such "extreme volatility and unpredictability," Jain has advised investors to stay on the “ sidelines” until further clarity emerges on the nature of the truce.
Significant short-covering in the derivatives segment by FPIs, amid a two-week shaky truce between Iran and the US announced last week, fuelled the market's first gain in six weeks through last Friday.
A breakthrough in the Islamabad talks could have spurred further closure of bearish bets, while the failure to reach an agreement could result in initiation of fresh shorts, analysts said.
Last week, the Nifty recovered almost 8.5% from its 52-week low of 22,182.55 on 2 April through Friday's close of 24,050.6, as oil plunged 13% to $95.2 a barrel following President Donald Trump's announcement of a two-week ceasefire to resolve the conflict in West Asia.
With talks in Islamabad having failed, uncertainty rises again over volatile oil prices, although a collapse in Nifty to the 52-week low is unlikely unless the fighting resumes, per G Chokkalingam, founder of research firm Equinomics. “If the truce still holds we may see a tempered fall rather than an oversized one , followed by a period of consolidation.”
While FPIs net sold shares worth ₹18,274.6 crore last week, domestic institutional investors (DIIs) net purchased shares worth ₹21,602.32 crore, according data from the National Securities Depository Ltd.
However, in addition to the net institutional inflow of ₹3,328 crore, according to depository data, FPIs closed out or covered ₹9,775 crore of cumulative short index futures–Nifty and Bank Nifty–positions last week, which accounted for much of last week's rally.
"Last week's rally was led by FPI short-covering," said Rohit Srivastava, founder of analytics firm IndiaCharts. “A favourable outcome of the peace talks could have extended the short-covering streak , but a deadlock is likely to drive FPIs to reinitiate fresh shorts, resulting in downside pressure on markets.”
Market participants trade shares in the cash segments of the National Stock Exchange (NSE) and BSE, using derivatives to hedge positions or speculate. NSE has a liquid equity futures and options segment, while BSE’s derivatives activity is concentrated in equity options.
NSE offers a weekly Nifty options contract expiring each Tuesday, while BSE offers a weekly Sensex contract that expires on Thursday. The weekly expiry is advanced by a day in case it falls on a holiday. For instance, this week's Nifty weekly expiry is on Monday, following market holiday on Tuesday due to Dr Baba Saheb Ambedkar Jayanti.
Market reaction on Monday to the failed talks would be exaggerated by the weekly expiry on that day, said Srivastava.
Based on weekly Nifty options data, the market could trade in a 23,770-24,328 range on Monday with a downside bias for now, said Sudhir Joshi, consultant, Khambatta Securities.
FPIs have remained short on index futures for eleven straight months since 8 May last year, coinciding with the four-day India-Pakistan armed conflict christened Operation Sindoor by India.
After being net long 7,464 contracts on 8 May, FPIs flipped, culminating in a record short of 279,467 contracts on 27 March this year. As of Friday, they were net short 206,227 contracts. The cumulative value of the long and short contracts stood at ₹58,721 crore as of Friday.
Retail investors, high-net-worth investors, domestic institutional investors, and proprietary traders take positions contrary to FPIs in index futures.
Ram Sahgal is a deputy editor at Mint. He has over 20 years of experience in journalism, with previous roles at The Intelligent Investor, Bombay Times, The Economic Times, and The New Indian Express. Between his media roles, he briefly worked at a commodities exchange before returning to his true passion, business journalism. Ram graduated in liberal arts from St Xavier’s College, Mumbai, where he studied films, which explains his move to Bombay Times, where he covered the film industry during the rise of Sunny Deol and Sanjay Dutt. He took a leap of faith to transfer to The Economic Times, and thanks to his restless mind, later moved to cover the commodities beat. Over the past three years, Ram has been tracking the stock markets at Mint. His focus areas include writing about market infrastructure institutions, brokerages, derivatives, and related regulations. His hobbies include spotting trains and understanding the locomotives that power them. In his free time, he takes his octogenarian mother out for drives and goes to the cinema with her on weekends. If he has a dream, it is to write a screenplay for a movie. For now, he enjoys viewing market data on NSE and BSE, observing the shifting mood of Mr Market, and conversing with market experts.