Why foreign investors are holding short positions on Indian stocks
What's the story
Foreign investors have demonstrated an unprecedented level of pessimism toward Indian stocks, the highest in over a decade, as per Bloomberg.
This sentiment is fueled by speculation that Prime Minister Narendra Modi's party may secure fewer seats in the ongoing national elections than previously anticipated.
The net short positions, a measure of global funds' bearish bets on index futures contracts, have surged to 213,224 contracts - the widest gap since data recording began in 2012.
Market withdrawal
Investors withdraw $4 billion amid election speculation
In line with the bearish stance in the derivatives market, overseas investors have withdrawn approximately $4 billion from local Indian stocks since early April.
This significant withdrawal reflects a cautious outlook regarding the election outcome.
A recent decrease in voter turnout has sparked speculation that a less decisive performance by Modi could potentially impede his ability to implement policy reforms, including those aimed at boosting infrastructure and manufacturing.
Market forecast
Potential market disruption predicted by strategists
Strategists Frank Benzimra and Rajat Agarwal from Societe Generale SA have voiced concerns about potential market disruption.
They stated, "What is not priced in is disruption, which could lead to a sharp and swift correction in the Nifty Index, similar to what we saw in 2004."
This prediction comes as India concludes its fourth phase of voting in its marathon elections, with the seven-phase polling set to conclude on June 1.
Election forecast
Modi predicts victory despite voter turnout concerns
Despite concerns over a dip in voter turnout, Modi is widely expected to win a third consecutive five-year term.
Modi has predicted that his Bharatiya Janata Party (BJP) and its allies will win more than 400 of the 543 seats in the Lok Sabha elections.
However, the decrease in voter turnout has raised concerns about BJP's support base, with factors such as an ongoing heat wave and lack of an overarching emotive issue being attributed to this trend.
Market volatility
Market volatility reflects investor anxiety over elections
Investor anxiety over the election outcome is reflected in the fear gauge, which measures potential market swings over the next 30 days.
Implied volatility for options expiring June 27, the closest monthly expiry after the vote count on June 4, surged to over 20% from less than 15% when polling began on April 19, as per Bloomberg data.
This increase indicates heightened uncertainty among investors about India's political future.