DIIs Net Sold Index Futures for the Last 8 Days: Insights from F&O Data

In a significant change in India's derivatives landscape, domestic institutional investors (DIIs) have turned net sellers of index futures for eight trading sessions in a row, liquidating more than 36,000 contracts. This exercise played out as the Nifty 50 index jumped almost 4% in the same time frame, prompting analysts to analyse the reasons behind such a decision.

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Profit Booking Amid Market Rally

Long-short ratio data of domestic institutional investors in index futures, as per the National Stock Exchange (NSE), has shown a sizable change. The ratio was about 3.9 on April 16, which signified nearly four long positions for every short. Now, the ratio has contracted to 2, meaning a slowly balanced ratio of 2 long positions for every short. This change signals some strategic unwinding of long positions, which is anticipated perhaps for consolidation in the market or portfolio rebalancing. ​

Shift in Long-Short Ratios

The National Stock Exchange (NSE) data shows a marked change in the long-short ratio of DIIs in index futures. On April 16, the ratio was 3.9, representing almost four long positions to every short. It has now come down to 2, indicating a more even stance of two long positions to a single shot. This change suggests strategic unwinding of long positions either in the wait for a market consolidation or for portfolio rebalancing. ​

Contrasting FII and Retail Activity

While DIIs have reduced their exposure to index futures, foreign institutional investors (FIIs) have adopted a more bullish outlook. In the initial sessions of the May derivatives series, FIIs have net bought 6,943 index futures contracts. The shift is further evidenced by an increase in their long-short ratio from 0.4 to 0.8, which indicates a reduction in short positions and a tilt towards long positions. ​

On the other hand, retail investors have exhibited a cautious approach, net selling 2,832 contracts during the same period. Their long-short ratio has adjusted to 0.8, suggesting a slight bias towards short positions . Proprietary traders have also shown a marginally bearish stance, with a long-short ratio 0.9. ​

Sectoral Movements and Open Interest Dynamics

Analysing sector-specific futures, the Nifty May futures have seen a modest increase of 0.2% in the first three trading sessions of the May series. Bank Nifty May futures have advanced by 0.3%, while Nifty Next 50, MidCap Nifty, and Nifty Financial Services (FinNifty) futures have experienced declines of 1.3%, 0.6%, and 0.5%, respectively. ​

Open interest (OI) data provides further insights into market sentiment. Bank Nifty May futures have witnessed a 9.1% decline in OI, primarily due to profit-taking after reaching record highs. Conversely, Nifty futures OI has risen by 13.6%, Nifty Next 50 by 21.2%, MidCap Nifty by 8.3%, and FinNifty by 2.8%, indicating varying investor interest across different indices. ​

Implications for Market Participants

Further divergences in the strategies of DIIs and FIIs show the complexity involved in market dynamics. DIIs are profit bookings in a market that seems to be on a rally, while FIIs might be increasing their exposure, expecting further upward momentum . The prevailing cautiousness among retail and proprietary traders adds complexity to the current market sentiments.

Investors should indeed continue to look closely at developments like these, as a change in institutional positions has significant implications for market trends. Learning the motivation behind such moves, whether profit taking, protecting, or reallocating strategically, adds much value in making investment decisions.

Conclusion

The current trend of DIIs net selling index futures clearly outlines the typical strategy during a bullish jinx: realising profit on the downside. On the contrary, FII buying is increasing, which indicates expectations in terms of future market behaviour. Staying closely attached to the evolution of the markets, institutional behaviours, and underlying data trends will prove crucial in the evolution of the investment landscape.