Foreign portfolio investors have intensified their bearish stance on Indian equity markets, pushing net cumulative shorts on Nifty and Bank Nifty futures to unprecedented levels. According to Rohit Srivastava, founder of analytics firm IndiaCharts, FPI bearish bets reached 186,063 contracts on Friday, surpassing the previous record of 174,105 contracts set on February 24 last year.

Record Bearish Positioning Signals Market Stress

The escalation in bearish positions extends beyond futures markets, with proprietary traders—brokers trading for themselves—significantly increasing their defensive positioning. These traders raised cumulative net sales of index call options to 116,680 contracts while simultaneously increasing cumulative index put option purchases to 198,367 contracts on Friday.

The combination of increased index futures selling, call option sales, and put option buying indicates both bearish sentiment and expectations of heightened volatility ahead.

Market Performance Amid Institutional Divergence

Despite the bearish positioning, the Nifty has demonstrated resilience through significant domestic institutional support. The benchmark index rallied 21% from its 52-week low of 21,743.65 on April 7 last year to reach a record high of 26,373.20 last Monday. However, sustained FPI selling pressure caused the index to decline 2.6% to 25,683.30 on Friday.

Options data suggests the market will likely trade within a 1.5% range of 25,500-25,900 through Tuesday, reflecting the current uncertainty.

Institutional Flow Dynamics

The stark contrast between domestic and foreign institutional behavior has become a defining characteristic of the current market cycle. Exchange and depository data reveals domestic institutions have net-purchased shares worth ₹6.17 trillion in the current fiscal year through Friday, while FPIs have sold ₹1.22 trillion worth through Thursday.

Factors Behind FPI Negativity

Several fundamental factors explain the sustained FPI bearishness. Better returns in the US market have made emerging market investments less attractive, with MSCI data showing the MSCI India index generated a gross return of only 4.29% over the year through December 2025, compared to 17.75% for the MSCI US index over the same period.

Currency depreciation has further eroded FPI returns, with the rupee declining 4.73% against the dollar to close at 90.16 on Friday. This depreciation significantly diminishes dollar-denominated returns for foreign investors.

Outlook and Structural Changes

Despite the bearish positioning, analysts highlight structural changes in market dynamics that may prevent severe corrections. Systematic Investment Plan (SIP) inflows of approximately ₹30,000 crore monthly through mutual funds provide consistent buying support.

Swarup Mohanty, vice-chairman of Mirae Asset Investment Managers, suggests investors should expect moderated returns compared to the post-pandemic period when the Nifty more than tripled from 7,511.10 on March 24, 2020, to 26,277.35 on September 27, 2024. He anticipates a return to pre-pandemic patterns where the Nifty typically doubled over five to six-year periods, with 2026 potentially favoring midcap outperformance in healthcare, chemicals, and capital market-related sectors.

Seventeen stocks in the Nifty 500 index experienced severe declines last week, with losses ranging between 10% and 18%, as heightened geopolitical tensions and warnings of higher tariffs by US President Trump weighed heavily on investor sentiment. The broader market turmoil saw the Nifty 50 post its worst weekly performance in over three months, shedding 645 points or 2.45%.

Investor confidence in the Indian market took a significant hit amid fears of fresh US tariffs on Indian imports, escalating geopolitical tensions, and renewed foreign portfolio investor (FPI) selling. The selling pressure caused Indian equities to underperform their Asian peers in early January, despite the Nifty 50 scaling a fresh record high of 26,273 at the start of the year.

Top Laggards Face Double-Digit Declines

Transformers & Rectifiers emerged as the week's biggest loser, with shares plunging 18.5% to ₹274.30 apiece. The sharp selloff followed the release of the company's December quarter performance, which significantly dented investor sentiment.

Elecon Engineering faced heavy selling pressure during Friday's session, with the stock sliding 16% after its December quarter results. This contributed to a cumulative 15.5% decline for the week, ending at ₹423.60 per share.

Profit Booking Hits High-Flying Stocks

Premier Energies extended its weekly losing streak to four consecutive weeks, falling another 15.2% to ₹717.45 per share. The stock has now declined nearly 48% from its all-time high of ₹1,388, reflecting significant profit booking by investors.

After rising for three consecutive weeks, Ather Energy also witnessed substantial profit booking, with shares ending the week down 14.6%. Similarly, Jupiter Wagons saw renewed selling after a brief pause, dragging the stock lower by 13.2% to ₹293 per share.

Broader Market Impact

The Nifty 500 index mirrored the broader market weakness, posting a decline of 2.62% for the week. Other notable decliners included:

Force Motors shares crashed 12% to ₹18,710 per share, ending a four-week rally. Despite the sharp weekly decline, the stock remains significantly higher over longer timeframes, up 185% over the past year, 400% in two years, and 1,270% over the past five years.

Market Outlook and Expert Recommendations

Mr. Ajit Mishra, SVP – Research at Religare Broking, emphasized the need for caution in the current volatile environment. He noted that while bargain hunting could lead to intermittent rebounds after the sharp correction, sustained upside is likely to remain capped until greater clarity emerges on earnings, global trade developments, and FII flows.

Mishra recommended that investors focus on capital preservation and maintain higher exposure to quality large-cap stocks while avoiding aggressive positions in high-beta or leveraged names. He also suggested that selectively positioning in domestically driven sectors with strong balance sheets may offer relative stability, while export- and commodity-linked stocks could remain vulnerable to further global shocks.

The market volatility has been exacerbated by FPI selling, which has reached ₹11,800 crores in January so far, adding to the downward pressure on Indian equities.