Fed rate hike rattles foreign investors with leveraged bets

livemint.com:

MUMBAI : The hike in a benchmark interest rate by the US Federal Reserve seems to have spooked Foreign Portfolio Investors (FPIs) who were punting and hedging on Indian index derivatives near record high levels. From holding most bullish positions in index futures (Nifty and Bank Nifty) contracts in four years last month, FPIs sharply cut their positions to a fraction after last Wednesday’s rate hike by the Fed. Their squaring off of leveraged bets was largely responsible for the Nifty correction from a record high of 19991.85 on 20 July to 19753.8 on 31 July because to close out a long position the FPI has to sell the contract, which adds to the overall selling pressure.

From a four-year high cumulative holding of 104,328 net long positions on 20 July, FPIs spliced their holding to just 5,667 contracts on 31 July. The last time FPIs held a bigger position of 126,827 contr-acts was on 26 April 2019. The paring of bets started ahead of the rate decision on 26 July and gathered pace thereafter.

The Fed Funds Rate hike, which raises cost of funds for all greenback borrowers, tends to drive hot money flows out of emerging markets (EMs) like India and for hedges to be squared off as cost of hedging increases. To be sure, FPI inflows into cash stocks continues with ₹46,618 crore net invested in whole of July, but post the decision FPIs cash buying has slowed with net sales of ₹1,250 crore on 28 July and ₹774 crore on 31 July. Just a day after Wednesday’s rate hike, FPIs cut over 50,000 contracts on expiry of July series of F&O (futures and options) contracts.