Foreign equity investors turn to hedging on India election jitters
options to hedge their equity portfolios against a slide in benchmark indexes as they worry that Prime Minister Narendra Modi's party may not achieve the landslide victory predicted by opinion polls just weeks ago.
The last major poll had estimated that the ruling Bharatiya Janata Party (BJP) party would win 342 seats, comfortably above the 272 majority required to return to power.
But a lower turnout so far in India's general elections and changing political rhetoric have dampened expectations of a landslide victory for the BJP and its allies.
Votes are set to be counted on June 4.
Foreign investors worried about the election outcome will resort to buying puts of the Nifty 50 or the Bank Nifty, which are the most liquid derivatives, said Vineet Arora, managing director at Dubai-based investment firm NAV Capital.
They may opt for derivatives on other indexes depending on their portfolio composition, he said.
Ahead of the results, the net open interest of put options on Indian indexes held by foreign investors hit the highest since at least January 2019, according to data complied by Reuters, based on information provided by the National Stock Exchange.
The net open interest — the difference between long put and short put positions — is currently at 2.5 times the daily year-to-date average.
The Nifty 50 Index last week fell 1.9%, compared to a 1.85% rally in U.S. equities and a 1% gain in the MSCI Emerging Markets Index.
On Tuesday, the Nifty 50 was up 0.1% at 22,130.20.
A put option is a derivative
