Foreign Investors Position for Budget Volatility with Bearish Derivatives Strategy
As the Union Budget for fiscal year 2027 approaches, trading patterns in the derivatives market reveal that foreign portfolio investors (FPIs) are preparing for either a market correction or an extended period of post-budget calm. These international investors, who have dominated bullish retail participants by consistently shorting Indian markets since October 2024, are entering the budget season with an extreme bearish outlook for the second consecutive year.
Analysts Decipher FPI Positioning and Market Expectations
Market analysts indicate that this strategic positioning reflects foreign investors' anticipation of either a market correction or a significant decline in volatility—essentially flat markets—following the budget announcement. In both scenarios, the option premiums paid by buyers would diminish, allowing FPIs to retain these premiums as profit. However, should the government present a market-friendly budget, substantial short-covering could occur, potentially accelerating any post-event rally.
Beyond their selling activities in cash and futures markets, FPIs currently hold net cumulative shorts of 132,312 index call option contracts covering both Nifty and Bank Nifty indices. Sellers of call options typically expect either price corrections or reduced volatility after major events, enabling them to keep premiums paid by call buyers who maintain bullish positions ahead of such events.
Historical Context and Previous Budget Positioning
Interestingly, ahead of the FY26 Budget presented on February 1 last year, FPIs maintained net short positions on 94,350 call contracts. On January 31, 2025, when these shorts were active, the Nifty 50 closed at 23,508.4 points. The following day, it reached an intraday low of 23,318.3 points—a decline of 0.8%—before settling at 23,482.15 points. This movement allowed FPIs to profit from their call positions during that period.
The previous budget scenario presents a contrasting picture. For the FY25 Budget presented on July 23, 2024—approximately one month after national election results—FPIs were net long calls by 339,167 contracts just one day prior. On July 22, 2024, markets closed at 24,509.25, declining to 24,469.05 the next day. This downward movement forced FPIs to close substantial portions of their positions due to mark-to-market losses, reducing their cumulative net call positions to 172,736 contracts.
Current Market Environment and Global Factors
The present situation differs significantly from previous years, with increased global volatility and tepid corporate earnings growth creating additional challenges. The pending India-US trade deal, unresolved since August last year, continues to weigh on market sentiment. Furthermore, 575 companies reporting third-quarter earnings through Thursday demonstrated only 0.8% sequential growth in net profit, reaching ₹96,385 crore according to Capitaline data.
Kruti Shah, quant analyst at Equirus, explained: "The positioning shows that FPIs expect a cooling off in volatility post the event, which will enable them to gain by retaining the options premium." She noted that earlier this week, FPIs sold a straddle—simultaneously selling call and put options at the same strike—at 25,000 Nifty for ₹860 per share, with contracts expiring on February 24. This strategy assumes a trading range of 24,140 to 25,860 for the current expiry month.
Market Performance and Technical Perspectives
The Nifty settled 0.4% lower at 25,320.65 points on Friday. As long as the index remains within the projected range, FPIs stand to profit from their positions. However, any significant breakdown or breakout could expose them to substantial losses.
Jay Vora, analyst at IndiaCharts, observed that FPI shorting indicates continued bearish sentiment toward Indian markets. His projected range for the Nifty 50 stands between 24,700 and 25,700 points.
So far this calendar year, FPIs have sold cash shares worth ₹38,624.3 crore, following substantial offloading of ₹2.4 trillion in 2025. Despite domestic institutional investors purchasing shares worth ₹69,822 crore this year—after record buying of ₹7.9 trillion last year—markets have declined due to global headwinds and lackluster earnings growth.
Market Trajectory and Recent Performance
The market initially tested a record high of 26,277.35 on September 27, 2024. After fourteen months, it reached a new record of 26,325.8 on December 1, followed by another lifetime high of 26,373.2 on January 5. From that peak, the Nifty has declined 3.6% to 25,418.9 as of Thursday.
Sahaj Agrawal, senior vice-president of research at Kotak Securities, commented: "The FPI positioning in index options and futures remains on the short side since quite some time. This, coupled along with cash selling, indicates a cautious stance by the FPI segment." For the short term, Agrawal anticipates that any movement above 25,500 could trigger buying interest or short covering, with sustainability depending on broader developments including budget outcomes and geopolitical factors. Downside support is identified at the 24,700 level.
Overall Market Sentiment and Positioning
Collectively, FPIs maintain net long positions in index puts alongside net short positions in index calls, reinforcing their highly bearish stance ahead of the crucial budget announcement. This strategic positioning reflects both caution regarding immediate market movements and calculated expectations for post-budget volatility patterns that could yield premium retention opportunities.
