Though the Nifty 50 has recovered twice in the recent past from around that level, analysts expect it to be broken this time around due to relentless selling by foreign institutional investors on the back of global tariff tensions and rising US bond yields.
One of the indications of this is the selling or writing of in-the-money (ITM) weekly Nifty call options by savvy derivatives traders. An ITM call is an option whose price is lower than the underlying Nifty price.
For instance, any option with a strike below Nifty’s 14 February (Friday) closing of 22,929.25 points is ITM. Such an option has both intrinsic and time value, unlike an out-of-the-money (OTM) or at-the-money (ATM) call that have only time or extrinsic value.
On Friday, option traders sold calls at 23,000, which is OTM, and ITM calls with strikes at 22,900 and 22,800. The 22,900 strike call saw an addition of 23,055 contracts on Friday, taking its outstanding positions to 26,428 contracts, per NSE data.
“Writing of ITM call supports the fact that structurally we remain in a consolidating, corrective phase that got under way since October,” said Sahaj Agrawal, senior vice president, derivatives research, at Kotak Securities, who expects limited downside once the 22,800 support is broken.
Kruti Shah, quant analyst at Equirus Securities, agreed, saying that buying by mutual funds could set in once the market breaks around 200-300 points below 22,800.
“This has been the case when recent supports have been breached since October,” said Shah, adding that selling of ITM calls “underscored” a “weak market” set-up.
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The foreign investor factor
The 22,800 level was tested twice recently with the markets bouncing from there. India’s stock market bounced from 22,786.9 on 27 January to 23,807.3 on 5 February. From there, it declined to 22,798.35 on 12 February before recovering to close at 22,929.25 on 14 February.
“The selling by FPIs (foreign portfolio investors), with news flows of US imposing reciprocal tariffs on all imports, is imparting the weakness to markets,” said Rajesh Palviya, senior vice president (technicals and derivatives), at Axis Securities.
He expects the level of 22,800 to be tested this week. The immediate resistance is the recent high of 23,807. There could be a bounce once the 22,800 level is tested followed by selling again.
FPIs have sold shares worth ₹99,299 crore in this calendar year through 13 February, per National Securities Depository Ltd (NSDL). In the financial year (2024-25) so far, they have sold shares worth ₹1.09 trillion both in primary and secondary market segments, a bulk of it in October and January.
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India’s underperformance
China has gained at the expense of India, where valuations remain elevated. Nifty has traded at an average of 22.32 times trailing earnings since 2014, which is higher than 16.77 times the average price to earnings multiple in the 10 years preceding 2014, per Bloomberg.
India’s underperformance is reflected in the MSCI China index outperforming MSCI India by way of gross returns over one-month, three-month, and one-year periods.
MSCI China generated a gross return of 35.16% over a year through 31 January while MSCI India gave a 5.88% return over the same period. Even the MSCI Emerging Market Index bettered India with a gross return of 15.35%, marking India to be among the worst performers with a depreciating currency.
In terms of valuations also China is more attractive than India. MCSI China traded at a price-to-earnings multiple of 13.11 times in dollar terms at the end of January against MSCI India’s P/E of 25.82 times, per global index provider MSCI.
Foreign investors use MSCI indices to allocate money to markets across the world.
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Sectors deep in the red
The recent sell-off in India has seen the Nifty correcting 13% from its record high of 26,277.35 points on 27 September to Friday’s closing of 22,929.25.
The Nifty Smallcap index has fallen into bear territory, declining 22.4% from its record high of 18,688.3 on 24 September to 14,501.65 on Friday. The Nifty Midcap 150, which is just above the 20% bear market level, ended at 18,346.8 on Friday, down 18.5% from its record high of 22,515.4 on 25 September.
The worst performing sectors as of Friday were the Nifty Realty and Nifty Oil & Gas indices, down 28% each from their 52-week highs, followed by the Nifty PSU Bank’s 27% decline.
Other underperformers were the Nifty Auto, Nifty FMCG, and Nifty Consumer Durables. These sectoral indices are down 20% each from their respective highs due to a slowdown in economic growth from 8.2% in FY24 to an estimated 6.4% in the current fiscal year owing to a fall in capital expenditure by the government and lower household consumption.