FPIs double down on Nifty option sales ahead of MPC meeting outcome
Subscribe to enjoy similar stories. Hot foreign money is wagering that Nifty will move over a 5% range (22,800 to 24,000) from Monday's close of 23,361, ahead of the monetary policy committee (MPC) meeting outcome on Friday.
To exploit this situation, foreign portfolio investors (FPIs), in a departure from their usual practice, have turned net sellers of Nifty call and put options in the past few days. With the rupee plunging to a record low of 87.29 on Monday, a day after the pro-consumption Union Budget and US President Donald Trump's imposition of fresh tariffs on imports from Mexico, Canada and China, a rate cut by the MPC has become less certain, said analysts.
Moreover, the US Federal Open Market Committee kept rates steady at 4.25-4.5% last week, citing persistent inflation. This follows a 100 basis points (bps) rate cut since September last year, they added.
FPIs have thus decided to exploit this uncertainty on the RBI rate action by selling both call and put options on Nifty – an options strategy known as a short strangle. Also read: FPIs are betting on these stocks despite the market downturn On Monday, departing from their usual practice of remaining net long calls and puts, they were cumulatively net sellers of index calls, largely Nifty, to the tune of 185,332 contracts and of index puts to the tune of 12,032 contracts.
If the RBI cuts rates the markets could rise but any rally will be capped by higher FPI outflows due to narrowing of the interest-rate differential between India and the US . If RBI decides to hold rates the markets could correct, but the correction should be limited as the central bank has other tools to provide additional liquidity to the banking system, such as buying bonds from banks or
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