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The recent Pahalgam terror attack, with its potential for retaliatory strikes against Pakistan, has understandably raised concerns about market stability. Historically, geopolitical tensions and military conflicts have often triggered significant market volatility, causing investors to reassess their positions and, in many cases, withdraw capital. However, the current behavior of Foreign Portfolio Investors (FPIs) suggests a different narrative. Despite the escalating tensions on the border, these investors appear to be maintaining a bullish outlook on the Indian stock market, indicating their belief that the market will remain relatively unscathed by the ongoing geopolitical uncertainties. This confidence is reflected in their activities within the derivatives market, particularly in their handling of option contracts. Option contracts serve as a form of insurance for investors, protecting them against potential market downturns. Specifically, put options give the holder the right, but not the obligation, to sell an asset at a specified price by a predetermined date. If the market price of the asset falls below the strike price of the put option, the holder can exercise the option and sell the asset at the higher strike price, effectively mitigating their losses. Conversely, call options give the holder the right to buy an asset at a specified price by a predetermined date. Analyzing the FPIs' activity in the options market provides valuable insights into their market expectations. The data reveals a significant reduction in their holdings of bearish put options, which suggests that they are less concerned about a sharp market correction than one might expect given the prevailing geopolitical climate. This reduction indicates that FPIs are either confident that the market will not decline significantly or are willing to accept the risk of a potential downturn without the protection afforded by put options. This behavior could be attributed to several factors, including a belief that the tensions will not escalate into a full-scale conflict, a positive outlook on the Indian economy, or expectations of favorable policy changes. Furthermore, FPIs have been actively buying stocks in the cash segment of the market, which further reinforces their bullish stance. This buying activity demonstrates a commitment to investing in Indian equities and suggests that they believe the market has the potential for continued growth. Experts attribute this buying spree, in part, to the anticipation of a bilateral trade agreement between India and the United States. A trade deal between these two economic powerhouses could significantly boost the Indian economy by increasing exports, attracting foreign investment, and creating new jobs. The expectation of such a deal could be driving FPIs to increase their exposure to the Indian market in anticipation of future gains. It is important to note that the decision-making process of FPIs is complex and multifaceted, influenced by a variety of factors beyond just geopolitical risks and economic indicators. These factors can include global market trends, interest rate movements, currency fluctuations, and political stability. However, the current data suggests that, at least for now, FPIs are maintaining a relatively optimistic outlook on the Indian stock market despite the escalating border tensions. On a particular Friday when public anger over the Pahalgam massacre was at its peak, FPIs drastically reduced their net index put option positions, plummeting from 177,784 contracts the previous day to a mere 6,359. This significant decrease highlights their reduced concern about potential market falls. The details behind the gross figures show that FPIs sold significantly more index puts than they bought on that particular Friday, ultimately decreasing the net long figure. This further reinforces the sentiment that they do not anticipate any major negative impact on the market due to the border tensions. This behavior contrasts with the typical risk-averse approach that one might expect in such circumstances. FPIs usually purchase put options to hedge their portfolios against potential market downturns. If the market declines, the value of these put options increases, offsetting any losses in their portfolios. Conversely, if the market rises, any losses in the put options are offset by the gains in the portfolio. However, the recent reduction in put option positions suggests a deviation from this hedging strategy, indicating a higher tolerance for risk among FPIs.
Rajesh Palviya, Senior Vice President and Head of Derivatives & Technical Research at Axis Securities, provides valuable insight into the FPIs' perspective. According to Palviya, this behavior indicates that FPIs, at least as of now, do not anticipate the tensions with Pakistan to escalate into a more serious conflict. His interpretation aligns with the broader view that the market impact of the border tensions is likely to be limited. This perspective is crucial because it offers a reasoned explanation for the FPIs' seemingly counterintuitive behavior. It suggests that they are carefully assessing the situation and making informed decisions based on their understanding of the geopolitical landscape. The historical context is also relevant in understanding FPIs' current behavior. Nirmal Jain, Founder of IIFL Group, points out that markets tend to demonstrate resilience during periods of conflict or geopolitical tension, as shown by the historical data. Anecdotal evidence suggests that the Indian equity market has often weathered such storms, defying expectations of a significant downturn. During the Kargil war, for instance, the Nifty rose by 37% between May and July 1999. Similarly, after the Balakot air strikes in February 2019, the market remained stable before rising by almost 7% by the end of March that year. These historical precedents may be influencing FPIs' current strategy, giving them confidence that the market can withstand the current tensions. However, it is important to acknowledge that the geopolitical landscape is constantly evolving, and there is no guarantee that past trends will accurately predict future outcomes. The current situation is characterized by a unique set of circumstances, including the heightened tensions between India and Pakistan, the ongoing global economic uncertainties, and the potential for a US-India trade agreement. All of these factors must be carefully considered when assessing the potential impact on the market. Despite the bullish sentiment among FPIs, some experts remain cautious. One veteran fund manager, while acknowledging the FPIs' behavior, suggests that it may be because they do not anticipate a surgical or air strike similar to those conducted in Uri in 2016 or Balakot in 2019. This perspective emphasizes the importance of considering different potential scenarios and their potential market impacts. The view sits in line with Rajesh Palviya's logic for FPI unwinding. He describes the situation as a potential "slow burn" that could last for an extended period, implying a low-intensity conflict with limited market impact. This could mean a sustained period of tension and sporadic clashes along the border, rather than a full-scale war. In such a scenario, the market might be able to adapt and adjust, minimizing any significant negative impact. Therefore, understanding the range of possible scenarios is essential for making informed investment decisions.
Alongside the reduction in put positions, FPIs have also been actively purchasing shares in the cash market. Data from NSDL indicates that in the second half of the month through Thursday, FPIs had net purchased secondary shares worth ₹27,648 crore. This buying activity has significantly reduced the selling intensity observed in the first half of April, from ₹34,305 crore to just ₹6,657 crore through April 24. This shift in behavior suggests a renewed confidence in the Indian market. Provisional data from BSE further supports this trend, showing that FPIs net purchased shares worth ₹2,952 crore on Friday. This continued buying activity reinforces the overall sentiment that FPIs are maintaining a positive outlook on the market despite the prevailing geopolitical uncertainties. The cash market buying is significant because it represents a direct investment in Indian equities, demonstrating a long-term commitment to the market. Unlike derivatives, which are often used for hedging or speculation, cash market purchases reflect a belief that the underlying assets have intrinsic value and the potential for future appreciation. As mentioned earlier, Axis Securities' Palviya believes that the recent FPI cash buying is primarily driven by hopes of a trade deal between India and the US, rather than concerns about the potential fallout from the Pahalgam massacre. This trade deal has the potential to unlock significant economic opportunities for both countries, leading to increased trade, investment, and job creation. The expectation of such a deal is likely to be a major driver of FPIs' bullish sentiment and their willingness to invest in Indian equities. Palviya's perspective suggests that economic factors are currently outweighing geopolitical risks in FPIs' decision-making process. This does not mean that they are ignoring the border tensions altogether, but rather that they believe the potential economic benefits of a trade deal outweigh the risks associated with the geopolitical situation. In conclusion, the current behavior of FPIs suggests a complex and nuanced understanding of the Indian market landscape. While the border tensions with Pakistan remain a concern, FPIs appear to be maintaining a bullish outlook, driven by factors such as expectations of a US-India trade deal and historical resilience during periods of conflict. Their activities in the derivatives market, particularly the reduction in put option positions, indicate a lower level of concern about potential market corrections. Simultaneously, their cash market buying demonstrates a commitment to investing in Indian equities. However, it is essential to remember that the geopolitical landscape is constantly evolving, and there are no guarantees in the market. Investors should continue to monitor the situation closely and make informed decisions based on their own risk tolerance and investment objectives. Option traders currently expect the Nifty to find support at 23840, followed by 23446 next week, while resistances are pegged at 24500 and 25000, according to NSE data. These levels provide useful benchmarks for assessing market movements and making informed trading decisions.
Source: Tensions are rising on the border but FPIs aren’t worried