Foreign investors short Nifty Bank futures on margin compression
Foreign portfolio investors are aggressively hedging their massive Indian banking exposure by shorting Nifty Bank futures after quarterly results revealed widening margin divergence among top private lenders.
Foreign portfolio investors flipped to net sellers of Nifty Bank futures on Monday, dumping positions worth a net ₹1,201 crore. The abrupt reversal followed the release of June-quarter earnings from major private lenders, which exposed growing stress on sector profitability.
Just one trading day earlier, foreign investors had purchased a net ₹1,441 crore in Nifty Bank futures ahead of results from HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank. The Monday futures selling was accompanied by a provisional net sale of ₹1,121 crore in the underlying cash market.
The catalyst for the shift was a contraction in net interest margins, a critical metric for bank profitability. HDFC Bank, which carries the highest weighting on the Nifty Bank index at 19.3%, reported a margin decline to 3.26% from 3.4% in the prior quarter.
The broader index's losses were cushioned by ICICI Bank, which holds a 14.16% index weighting. The lender gained 1.1% after reporting a four basis point expansion in its net interest margin to 4.36%.
For foreign investors, the futures shorts serve as a tactical hedge against near-term price volatility rather than a wholesale exit. Financial services shares constitute 31% of the $724 billion in Indian equities held by foreign investors as of July 15.
“There is some caution among FPIs as low-cost funds (Casa deposits) of some banks are falling, raising the overall cost of funds and pressuring their NIMs,” said Sudhir Joshi, a consultant at Khambatta Securities. He expects the Nifty Bank to trade within a 56,000 to 61,000 band, noting that domestic investors are likely to step in on downward pressure. The index currently sits comfortably within its 52-week range of 49,954.85 to 61,764.85.
Some strategists view the foreign selling as a technical reaction that presents a value opportunity. HDFC Bank is currently trading at 2.57 times its book value, a steep discount to its historical average of above 4 times.
“Valuations of the likes of HDFC Bank are compelling, and any further correction of say 1-2% will be a good buying opportunity,” said Dr V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. “I am very bullish on ICICI Bank and bullish on HDFC Bank.” ICICI Bank currently trades at a price-to-book ratio of 4.06.
