FPIs struggle to shake off fears, bearish bets hit four-month high

Foreign portfolio investors’ (FPI) net shorts on Nifty and Bank Nifty futures stood at 121,820 contracts on Tuesday, the highest since 128,390 contracts on 19 March, according to analytics firm IndiaCharts.

These short positions are essentially hedges against falling markets, which reduces the value of their equity assets. The total FPI equity assets stood at ₹74.18 trillion as of 30 June against mutual funds’ equity-oriented schemes’ assets worth ₹32.69 trillion, according to NSDL and AMFI data.

“While markets have factored in FY26 Nifty earnings per share growth at 11%, EPS growth for FY27 has been cut to 15.5% currently from almost 22% at the beginning of the year, which is behind the cautious FPI stance, as relative to earnings growth expectations our valuations are rich,” said Shrikant Chouhan, EVP (head of research), Kotak Securities.

Based on FY25 EPS of ₹1,013, the Nifty’s current price to earnings multiple of 25 is higher than the five- and three-year average of 24.23 times and 22.46 times, respectively, according to Bloomberg data.

FPIs’ bearish stance is underscored by their selloff in the cash markets as well. In the calendar through 15 July, they have sold shares worth ₹1.07 trillion in the secondary market, according to data by NSDL. By comparison, domestic institutional investors (DIIs) have net purchased shares worth ₹3.74 trillion.

Chouhan said fears of rising inflation in the US could drive up bond yields there, “putting the brake” on further rate cuts, which could strengthen the dollar, leading to further FPI outflows from emerging markets like India.

Nifty earnings grew by a tepid 6.4% to ₹1,013 per share in FY25. The FY26 EPS has been estimated at ₹1125, an 11% growth, already discounted by the market.

What is spooking FPIs is the cut in EPS growth estimate for FY27 to ₹1,300 per share now from ₹1,370 in January, which markets are beginning to discount on a likely slowdown in private capex, amid uncertainty created by the global trade war and depressed consumer spending, said Sudhir Joshi, consultant at Khambatta Securities.

Meanwhile, the US Fed, which has cut its key interest rate by one percentage point to 4.25-4.5% between September and December last year, has been holding back this year on concerns of the global tariff war feeding into US consumer prices. With President Donald Trump slapping 30% tariff on the European Union, America’s largest trading partner, effective 1 August, fears abound that retaliatory tariffs by the 27-country economic bloc could further increase consumer prices.

Annual inflation in the US spiked by 30 basis points to 2.7% in June, showing how tariffs were beginning to impact prices from apparel and groceries to furnishings.

“These increases would preclude further rate cuts and apply upward pressure on dollar and bond yields, evident in the increased hedges being taken by FPIs in Nifty and Bank Nifty futures,” added Chouhan.

Another reason is the outperformance of other emerging markets relative to India. While gross returns for MSCI India index stood at 6.55% in the calendar year through June, MSCI Emerging Market Index outperformed with a 15.57% gross return over the same period, according to MSCI, whose indices are used by global funds to allocate money across markets.

While Nifty earnings are likely to grow in low double digits, those of other emerging markets could be of a higher order of 16-17% this year from 10% a year back, said Ashish Gupta, chief investment office (CIO) of Axis Mutual Fund.

“This makes other EMs a relatively bigger draw for FPIs,” said Gupta. “Within the EM basket, markets like Taiwan and Korea are estimated to have over 20% growth. Even in Europe, earnings growth is expected to accelerate this year to 8-14%.”

Indian stock markets plunged 17% from a record high of 26,277.35 on 27 September last year to a 10-month low of 21743.65 on 7 April this year. From there, the market rose to a high of 25,669.35 on 30 June, only to tumble 1.8% to 25212.05 by Wednesday (16 July) amid growing concerns over the trade war and earnings growth.