Rebound or breakdown? FII index futures shorts stay near record high post-Budget

Market participants said this heavy positioning has capped recovery attempts in recent sessions, with any bounce facing steady supply as hedges remain in place.

• FII net short positions in index futures hit record highs post-Budget
• STT on futures and options raised sharply, impacting derivatives traders
• Trading volumes may drop 20–30 percent due to higher transaction costs

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Foreign institutional investors have entered the post-Budget trading phase with one of their highest net short positions in index futures on record, signalling continued caution on Indian equities after the government delivered a body blow to derivatives traders by sharply raising Securities Transaction Tax on futures and options, even as the rest of the Budget largely met market expectations.

Data shared by Rohit Srivastava of Indiacharts shows that FII net short positions in index futures peaked at 2.27 lakh contracts on January 23 — the highest level on record — and remained elevated at around 1.94 lakh contracts as of January 30, heading into the Budget. The positioning remains the most aggressive foreign hedge build-up seen over the past decade.

According to Srivastava, FIIs were already carrying unusually large short positions in Nifty futures before the Budget, signalling a defensive stance that has so far failed to unwind despite intermittent rebound attempts in the index.

“Unlike earlier phases where extreme FII shorts tended to act as a contrarian signal, this time the positioning has been directional,” Srivastava said, adding that foreign investors continued to add to shorts as the market declined through January. “This pattern was seen only once before, ahead of Covid, when shorts did not trigger a rebound but were followed by further downside.”

Market participants said this heavy positioning has capped recovery attempts in recent sessions, with any bounce facing steady supply as hedges remain in place. While large-scale short covering could trigger a sharp rebound, traders said the timing and pace of any unwinding remain uncertain.

At the same time, sentiment has taken another hit from the government’s decision to raise securities transaction tax (STT) on derivatives in Budget 2026. STT on futures has been increased to 0.05% from 0.02%, while STT on options premium and option exercise has been raised to 0.15% from 0.10% and 0.125%, respectively.

Brokers Moneycontrol spoke to said trading volumes could undergo a reset in the coming weeks, with activity likely to fall by 20–30% due to the higher cost of trading, adding another layer of near-term uncertainty to the market.