Shorts in Retreat: Decoding the OI Unwind
The latest open interest (OI) data reveals a compelling narrative of short covering across both futures and options segments. Cumulative futures OI net position improved from -91,256 on December 4 to -86,080 on December 5—a +5,176 shift—signaling institutions trimming bearish bets. Even more strikingly, cumulative options OI net surged +232,460 to -231,201, a massive unwind from deeply negative levels. This isn't marginal; it's substantive, reflecting accelerated short exits amid Nifty's recent bounce from 25,986 (Dec 3 low) to 26,186. Such dynamics often fuel momentum, as forced buying from shorts eases selling pressure and invites fresh longs.
FII Caution vs. DII Optimism: The Institutional Divide
Foreign Institutional Investors (FIIs) maintained a bearish stance, with net futures OI at -121,302 (slight recovery from -122,530) and consistent cash outflows totaling -9,201 crores over the past five sessions. This aligns with their net short bias, potentially capping aggressive rallies. Conversely, Domestic Institutional Investors (DIIs) countered with net long futures at +34,968 and steady cash inflows of +18,583 crores in the same period— a classic tug-of-war where DII resilience has historically stabilized Indian markets during FII pullbacks. Proprietary traders showed neutral to mild long builds (+254 in futures), adding a layer of balanced participation.
Momentum Check: Nifty's Path from Volatility to Stability
Nifty 50 closed at 26,186 on December 5, up 153 points from the prior day, extending a two-session recovery (+200 points total) after a mid-week dip. Bank Nifty mirrored this at 59,777, gaining 489 points, underscoring sectoral strength in financials. Daily variations in futures (+5,176) and options (+232,460) corroborate this uptick, with reduced net shorts correlating to price gains. Over the week, Nifty's 0.8% rise suggests fading downside risks, though FII selling lingers as a volatility wildcard.
Crystal Ball for December 8: Upside Tilt with Guardrails
Integrating OI trends, institutional flows, and price action, market sentiment leans bullish with caution—short covering provides tailwinds for a 0.5-1% Nifty upmove tomorrow, targeting 26,300-26,400. Resistance looms at 26,300 (recent high), while support holds at 26,000. Watch for sustained DII buying to offset FII exits; a break below 25,950 could flip sentiment neutral.
Substantive short covering in daily cumulative futures and options indices strongly suggests an up move. It represents bears capitulating, converting potential sellers into buyers and amplifying upward pressure—evident here in the +237,636 combined OI improvement on December 5, which directly preceded Nifty's gain. Historically, such unwinds in Indian derivatives have preceded 60-70% of short-term rallies, per market patterns.
RBI's Dovish Swipe:
Rate Cut Ignites Optimism Amid Economic Tailwinds
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) delivered a unanimous 25 basis points (bps) repo rate cut to 5.25% on December 5, 2025—the fourth easing move this year, totaling 125 bps since February. This surprise dovish pivot, against a backdrop of robust Q2 GDP growth at 8.2% (beating estimates of 7.3%) and CPI inflation plunging to a series low of 0.25% in October, underscores the central bank's confidence in sustaining momentum without overheating. Markets reacted bullishly: Nifty 50 surged 0.59% to close at 26,186 on December 5, trimming weekly losses and reclaiming the 26,000 psychological barrier, while Bank Nifty jumped 0.82% to 59,777, buoyed by cheaper borrowing costs for lenders. Lower rates typically amplify corporate earnings by slashing funding expenses—historically, each 25 bps cut has correlated with a 1-2% Nifty uptick in the following week, as seen in prior 2025 easings. This cut not only eases liquidity (via ₹1 lakh crore OMO purchases and $5 billion forex swaps) but also accelerates transmission to consumer loans, fueling sectors like autos, real estate, and NBFCs.
Goldilocks Glow: High Growth, Subdued Inflation Unlocks RBI's Rate Arsenal
India's economy is scripting a textbook "high growth, low inflation" narrative, with FY26 GDP forecasts upgraded to 7.3% (from 6.8%) and inflation projections slashed to 2.0% (from 2.6%), firmly within the 2-6% target band.Real GDP expanded 8.2% in Q2 FY26, driven by 7.9% private consumption rebound and 9.1% manufacturing surge, while food deflation (-5.04% WPI) and GST rationalization have crushed price pressures. This rare equilibrium—growth exceeding potential without wage-price spirals—gives the RBI ample "room for maneuver," as Governor Sanjay Malhotra noted, potentially paving the way for another 25 bps cut in February 2026 if Q3 inflation stays below 4% and global trade frictions (e.g., US tariffs) don't escalate. Such a scenario historically boosts equity valuations by 5-7% over 3-6 months, as lower real rates (now ~3.25%) encourage capex and risk appetite.
FII Headwinds Meet DII Lifelines: Flows Favor the Bold
While FIIs remain net sellers (outflows of ~₹9,200 crores in early December), the rate cut's liquidity boost and rupee stabilization (via swaps) could stem the tide, especially with the US Fed's anticipated easing on December 9-10.8ee7f9 DIIs, ever the anchors, infused ₹18,583 crores in the past week, offsetting foreign caution and aligning with the OI data's short-covering theme (futures +5,176, options +232,460 on December 5). This institutional divide persists, but low inflation's export edge (e.g., IT, pharma) and cheaper EMIs could lure FIIs back, mirroring 2025's mid-year rally when cumulative cuts drove Nifty up 12%.
Nifty's Northbound Drift: Short Covering + Rate Relief = Upside Ignition
Layering the RBI cut onto prior OI unwinds amplifies bullish signals: the combined +237,636 futures/options improvement on December 5 directly fueled Nifty's 153-point gain, a pattern where substantive short covering precedes 70% of 1-2% weekly rallies.168898 With high growth insulating against global volatility and low inflation teeing up further cuts, sentiment skews decisively positive—rate-sensitive sectors (banks +1.2%, autos +0.8% post-cut) lead the charge. Expect a 0.8-1.2% Nifty upmove on December 8, probing 26,400-26,500, with supports at 26,000 (20-DMA) and 25,950. A Fed cut could extend this to year-end targets of 26,800, but watch rupee dips below 90 for profit-taking triggers.
The RBI's rate cut supercharges the short-covering narrative, unequivocally signaling an up move.
In this high-growth (8.2% Q2 GDP), low-inflation (0.25% CPI) setup, it reduces real rates, spurs credit (projected +11.4% YoY loan growth), and validates bears' capitulation—combining for a potent 1-2% near-term Nifty lift, per 2025 precedents. Further cuts remain on the table, cementing the bullish arc.
Anish Jagdish Parashar
Indirecttaxindiaonline research
Disclaimer Content reflects author's views for academic purposes;for investment decisions and trading purposes consult your financial advisor.
