Retail and wealthy investors have taken huge long bets on index and stock futures contracts, reinforcing their expectations of political continuity, according to analysts.
Foreign institutional investors (FIIs), on the other hand, are being cautious, hedging their bullish bets on single stock futures contracts and cash portfolios by building huge net shorts on index futures.
The ongoing election has left the stock market volatile for several weeks now, with investors swinging between optimism and nervousness ahead of the results on 4 June.
The market had baked in a sweeping victory for the incumbent Bharatiya Janata Party-led National Democratic Alliance before polling began on 19 April, but a section of the investors have been jittery about the margin of victory.
A historic high
The bullishness of retail and high-net-worth (HNI) investors is reflected in the marketwide futures open interest at the start of the June series, which stands at ₹4.06 trillion ($19.4 billion)—a historic high, according to Abhilash Pagaria, head, Nuvama Alternative & Quantitative Research.
The figure was ₹3.94 trillion at the start of the May series.
Retail and HNI investors, designated as clients by NSE, held cumulative net long single stock futures (SSF) positions of 2,797,000 contracts, and 296,134 net long cumulative index futures contracts (Nifty, Bank Nifty).
FIIs, on the other hand, held 425,278 net long SSF contracts, and 297,798 net short index contracts (Nifty, Bank Nifty).
“FIIs are entering the event with extreme caution, hedging their long SSF bets by shorting index futures,” said Pagaria.
While index futures derive their value from spot indices like Nifty and Bank Nifty, SSFs derive their value from underlying stocks.
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The historic high open interest at the start of the June expiry reflects the “bullishness” of local investors, who are expecting the NDA to return to power, said Rajesh Palviya, senior vice president, Axis Securities Ltd.
Palviya expects that if the NDA wins at least 300 of the 543 Lok Sabha seats in Parliament (not counting the two seats reserved for the Anglo Indian community), the market would hit a fresh high. And the NDA wins a simple majority of 272-275 seats, the Nifty “could easily” correct by 500-600 points on 4 June.
The fear gauge
In terms of cash market activity, FIIs net sold shares worth ₹34,258 crore from 1 April through 30 May, according to NSDL data. Over the same period, DIIs net purchased ₹97,805 crore worth of shares, as per BSE data.
While clients on BSE have net sold shares worth ₹16,797 crore in the fiscal year so far, they purchased ₹13,370 crore in April.
Data from May will be available with a one-month lag.
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The fear gauge, India Vix, has risen by 88% in May and was at 24.60 on Friday. The Vix shares an inverse correlation with the market: rising when the market falls, and vice-versa.
Nifty options expiring on 6 June, aligning with the election results, show 23,000 points as a major resistance level, followed by 23,500 and 24,000 points. The major supports are 22,500, 22,000, and 21,000 points.
According to Palviya of Axis Securities, the Nifty could hit 25,000 points if the NDA secures 400 seats in the Lok Sabha, and 24,000 points if it wins in more than 300 seats. If the NDA loses, though, the Nifty could test 21,000 points, he said.
At the end of trading on 31 May, the Nifty was at 22,530.70 points, having shed net 0.33% during May.
