Foreign Investors' Large Equity Purchase Explained by Futures Expiry, Signaling Bullishness on India

On Tuesday, foreign portfolio investors (FPIs) recorded a massive net purchase of ₹10,339.8 crore in the Indian equity cash market. This figure surprised many analysts as it occurred without any significant rebalancing of benchmark indices like the Nifty or major block deals. However, experts like Kruti Shah, a quant analyst at Equirus, and Rajesh Palviya, head of research at Axis Securities, explained that the surge was primarily due to the monthly expiry of stock futures and options contracts.

FPIs, who held substantial stock futures positions, chose to let these contracts expire, obliging them to take physical delivery of the underlying cash shares. This process simultaneously closed out their futures positions, leading to a reduction of 122,914 stock futures contracts. When exercising futures, investors must pay the full amount for the shares, unlike the margin required to hold the futures contract. This explains the large cash outflow registered as equity purchases.

Impact: This activity, while not entirely new investment, indicates a growing confidence among FPIs regarding the Indian market. Their bullish outlook stems from expectations of a demand recovery in both rural and urban areas, driven by policy changes like GST rationalization and the Reserve Bank of India's interest rate cuts. This sentiment is crucial as it often precedes increased investment flows, potentially leading to stock price appreciation and further market gains. Rating: 7/10.

Difficult terms: * **Foreign Portfolio Investors (FPIs)**: Investors from other countries who buy stocks and bonds in India. * **Equity Cash Market**: The market where actual company shares are bought and sold for immediate delivery. * **Benchmark Indices**: Major stock market indicators like the Nifty 50, used to gauge overall market performance. * **Block Deals**: Large share transactions executed between two parties outside the regular stock exchange order book. * **Futures and Options (F&Os)**: Derivative contracts that allow trading on future prices of assets. * **Stock Futures Contracts**: Agreements to buy or sell a specific stock at a set price on a future date. * **Rollover**: Moving an open futures or options position to the next contract month. * **Monthly Expiry**: The final trading day for a monthly futures or options contract. * **Underlying Cash Stocks**: The actual shares of a company that a derivative contract is based on. * **Stock Derivatives**: Financial instruments whose value is derived from the price of underlying stocks. * **Compulsory Delivery**: An obligation to deliver or receive the underlying asset when a derivative contract expires. * **Open Interest Positions**: The total number of derivative contracts that are still active and not yet settled. * **Margin**: A partial amount deposited to secure a derivatives trade, covering potential losses. * **Goods and Services Tax (GST) Rate Rationalization**: Adjustments made to the GST tax structure. * **Reserve Bank of India (RBI) Interest Rate Cut**: The central bank lowering its key interest rates to stimulate the economy.