Retail investors bet big on India derivatives as foreigners balk

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Indian retail investors are turning most bullish on stock derivatives ahead of the outcome of the country’s elections next week, even as foreigners are treading cautiously. 

Individual investors, including high net-worth traders, added more than 1,00,000 long contracts in index futures on Thursday, taking their net positioning to the most bullish levels on record, data compiled by Bloomberg showed. In contrast, foreigners turned most pessimistic.

That reflects higher risk-taking by millions of retail investors looking for financial gains. The Indian stock market is headed for a ninth year of gains, boosted by Prime Minister Narendra Modi’s pro-growth policies, and one of the world’s fastest economic growth rates. Modi is widely expected to win a third term. 

Retail and HNI investors have been “super bullish” on Indian equities, and have opted for riskier positioning during key events, such as earnings season, monetary policy reviews and now the elections, according to Abhilash Pagaria, who heads alternative and quantitative research at Nuvama Wealth Management Ltd.

Global funds have largely been cautious in cash as well as the derivative markets ahead of India’s seven-phase election that ends on June 1. Market participants will get their first hint of the likely outcome later that day when the exit polls are released. Election results are due on June 4. 

Foreigners have sold $3.1 billion of stocks in the cash market this month, taking the net market outflow this quarter to $4.2 billion, according to Bloomberg-compiled data. That comes amid concerns spurred by reports of low voter turnouts and close contests in some states.

Global funds’ net positioning in index derivatives turned most pessimistic on record on Thursday, as they added 86,482 short contracts, while unwinding more than 2,00,000 long contracts, Bloomberg-compiled data showed. 

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