Recent behaviour of FIIs in Indian stock market and effects thereof;

In the context of the Indian market, when Foreign Institutional Investors (FIIs) maintain a specific position in various financial instruments—such as being net short on option indices, net short on future indices, net short on option stocks, and long on future stocks while being substantive sellers in the cash market—it encapsulates a certain psychological and technical outlook on market sentiments and potential price movements. Here’s how this scenario can affect the option index and overall market sentiments: ### Effect on Option Index: 1. **Net Short on Options**: Being net short on option indices generally indicates that FIIs expect the market to decline or be bearish. This means that they are betting against the market-moving upward, which could lead to increased volatility in the option market. 2. **Impact on Implied Volatility**: A net short position indicates that more traders are selling options rather than buying. This can lead to a decrease in implied volatility as the demand for options decreases, which may result in lower option premiums. This can make the options market less attractive to other investors, potentially leading to a decrease in overall option activity. 3. **Market Corrections**: With FIIs being net short, this may signal apprehension in the market. If they are correct in their predictions and the market moves downwards, option index values could decrease, prompting further selling as other investors follow the trend. ### Impact on Overall Market Sentiments: 1. **Bearish Sentiment**: FIIs being substantive sellers in the cash market suggests a bearish outlook. This could induce fear or uncertainty among retail investors and other market participants, potentially leading to a larger market downturn as more participants might decide to exit their positions. 2. **Market Pressure**: The combination of short positions across various instruments creates selling pressure in the market. The increase in selling activities could push prices down, affecting investor confidence and possibly leading to more market participants adopting a risk-off approach. 3. **Long Positions in Futures Stocks**: The long positions in future stocks indicate that FIIs may still see value in select stocks, or they could be hedging against their short positions. This could create some divergence in individual stock performances, leading to selective buying opportunities or a mixed sentiment in the broader market. 4. **Caution Among Retail Investors**: Retail investors may take cues from FII behavior, often viewing them as market leaders. If they perceive FIIs as bearish, it could lead to a general withdrawal from the equity markets by retail investors, further exacerbating declines. ### Conclusion: In summary, the stance of FIIs being net short on options and futures while selling in the cash market typically points to a bearish outlook for the broader market. This can lead to reduced activity in the options market, lower implied volatility, increased fear among retail investors, and significant selling pressure in the cash market. If investors continue to follow this trend, we could expect a more cautious or negative sentiment in the overall Indian equity market. Anish J Parashar Securities Analyst disclaimer Content is for educational purposes only For investment purposes consult your financial advisor.