FIIs in short covering mode these days

Hyderabad: Despite a 5-day rally, NSE Nifty is still trading 506.15 points or 2.79 per cent lower this year so far as it closed the week at 17,599.15 points on Thursday (April 7) as against 18,105.30 points on December 30, 2022. Foreign institutional investors (FIIs) preferred to cover their short positions taking advantage of buying support extended in banking, finance, auto and realty stocks as RBI kept repo rate unchanged at 6.5 per cent. This propelled headline indices to near to the monthly high levels.

The Nifty extended its gains by another 1.5% in a truncated week driven largely by short covering. Financial stocks were the major gainers of the week along with mid-cap and small-caps, which reverted sharply in the new financial year.

According to data from ICICIdirect.com, Nifty closed over two million shares in the last two weeks where net shorts by FIIs fell to 1.1 lakh contracts from 1.95 lakh contracts seen in mid-March. This is indicating ongoing short covering by FIIs. When net shorts in high volumes, the cash-based action is largely missing. Analysts observe that a move beyond 17,800 may be seen only if follow up buying in the cash segment.

The Bank Nifty also extended its gains to move to its highest levels in almost a month amid continued outperformance from the private sector heavyweights. PSU banks joined the move after a pause in policy rates by the RBI. However, a major covering move was experienced in the heavily beaten down rate sensitive stocks from realty and financials.

Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd, said: “On the daily chart, Bank Nifty made a lower high and lower low pattern. If Bank Nifty is able to break the level 41,800 on the daily chart, then we can see the bull grip over the bears.”

Bank Nifty futures saw sharp covering and Open Interest in April series declined to nearly 22 lakh shares from 35 lakh shares seen at the inception of the series. This suggests the current move is due to short covering. However, we feel on upsides 41500 will act as an immediate hurdle

From an options perspective, both Call and Put 41000 strike hold the highest open interest base.

“The current month rollover of Bank Nifty is 93 per cent, which is the highest in the last four months. If we see the rollover average of Bank Nifty for the last three months excluding the current month then the average is 84.75 per cent, which indicates strong rollovers.

Currently, Bank Nifty is trading above its rollover levels, which indicate strength in Bank Nifty, but we must watch the level of 41800-42000 as a key level. Banking stocks like HDFC Bank and Kotak Bank are among the highest rollovers in the F & O segment. Support is placed around 39,500 points, whereas resistance is around 41,800. Any breach on either side we can expect the good trend” forecasts Bisht.

Aggressive Call writing is currently missing and Put OI is significantly higher than Call OI. For

next week, the Nifty is witnessing noteworthy Put writing at 17400 and 17500 strikes. Analysts forecast that 17,450 levels should be held and declines towards these levels remain a buying opportunity.

Going ahead, Nifty may extend its gains towards 17800 amid expectations of continued short covering in rate sensitive stocks where declines towards 17400 may be a buying opportunity.

FIIs were net buyers last week in equities as they bought over Rs2,700 crore in equities. The buying support from FIIs emerged after recent continued outflows in emerging markets. Indian equity market received FII inflows of $1.4 billion in March including some block deals whereas most

emerging markets witnessed continued outflows.

FIIs shifted their focus to the Indian market and it’s vital for a further recovery on domestic bourses. Domestic institutional investors (DIIs) also remained positive as they bought Rs1,200 crore in secondary markets during the week.

FIIs in the F&O space were active in the index space where they closed their shorts aggressively. Net shorts in index futures declined from almost 1.95 lakh contracts to 1.1 lakh contracts suggesting continued short covering. FIIs further reduced their bearish bets in the Put options and net long Puts declined considerably to near three lakh contracts.