Indian equity markets are bracing for a potentially choppy start to the week, driven by foreign portfolio investors (FPIs) ramping up their bearish bets to a historic peak. This surge in pessimism comes ahead of a crucial US Supreme Court verdict on the validity of former President Donald Trump's tariffs, a decision with significant implications for India's exports.
Record Bearish Bets and Rising Volatility
On Friday, FPIs escalated their net cumulative short positions on Nifty and Bank Nifty futures to a record 186,063 contracts, according to data from Rohit Srivastava, founder of IndiaCharts. This surpasses the previous high of 174,105 contracts noted on 24 February 2025.
Simultaneously, proprietary traders—brokers trading for their own books—amplified the bearish signals. They increased cumulative net sales of index call options to 116,680 contracts and boosted their cumulative purchases of index put options to 198,367 contracts. This combination of selling index futures, offloading call options, and buying put options is a classic indicator of mounting bearish sentiment and expectations of heightened market volatility.
The Looming US Verdict and Market Performance
The immediate trigger for the caution is the impending US Supreme Court decision, expected this week. The court deferred its ruling to 14 January. The verdict will either solidify Trump's trade policies or offer relief for Indian exports to its largest market, the US.
This uncertainty has capped the market's upward momentum. Despite a 21% rally from its 52-week low of 21,743.65 on 7 April 2025 to a record high of 26,373.2 last Monday, the Nifty succumbed to selling pressure. It fell 2.6% to 25,683.3 on Friday. Options data suggests the index may trade in a range of 25,500 to 25,900 in the near term.
Why Are FPIs Turning Negative?
Analysts point to several factors driving foreign investor caution. Better returns in the US and a depreciating Indian rupee are primary concerns. Data from MSCI shows the MSCI India index delivered a gross return of just 4.29% over the year through December 2025, compared to the MSCI US index's 17.75%.
The rupee's 4.73% decline against the dollar, closing at 90.16 on Friday, further erodes dollar returns for foreign investors. "FPIs are getting more attractive risk-free returns from the US compared to risky emerging market assets like India," said Sudhir Joshi, a consultant at Khambatta Securities.
Rohit Srivastava noted that the old market logic, where record FPI shorting often led to a bounce from short-covering, has broken down since April last year. FPIs have maintained shorts even during the market's recovery to new highs.
Domestic Support and a Reality Check on Returns
A key buffer against a sharp market crash is the relentless inflow from domestic institutional investors (DIIs). In the current fiscal year through Friday, DIIs have been net buyers of shares worth ₹6.17 trillion, starkly contrasting with FPI net selling of ₹1.22 trillion (through Thursday).
Swarup Mohanty, Vice-Chairman of Mirae Asset Investment Managers, highlighted the structural change brought by systematic investment plans (SIPs), with nearly ₹30,000 crore flowing into mutual funds monthly. "This obviates an outsized correction," he stated.
However, Mohanty advised investors to moderate return expectations. He suggested that the post-pandemic period—where the Nifty tripled from a low of 7,511.1 on 24 March 2020 to a high of 26,277.35 on 27 September 2024—was an aberration. Markets are likely to revert to the pre-pandemic trend of doubling over five to six years. He also predicted that 2026 could be a year of outperformance for midcap stocks in sectors like healthcare, chemicals, and capital market-related themes.
