Trading interest plunges in equity derivatives

With enthusiasm of foreign institutional investors down over uncertainty regarding policy issues, open interest positions are at year's low

Action is missing in the country’s stock markets on the back of the absence of foreign institutional investors (FIIs) from the scene.

Open interest (OI) or, simply put, trading positions in the equity derivatives market are at their lowest in the past year. The overall OI, which was a little over Rs 42,000 crore in May last year and rose to around Rs 47,000 crore in October 2011, was down to Rs 37,100 crore today.

Usually, OI positions should grow but market players say there is no enthusiasm among trades due to the fragile political situation and uncertainty over policy issues, which has had a domino effect on the entire business scenario.

In the April series, the OI fell by Rs 600 crore, as large trading positions were unwound. The general anti-avoidance rule (GAAR) proposal, which aims to crack down on tax evasion by FIIs, has created turmoil.

Although the finance ministry had said a clarification would be issued on GAAR to avoid confusion among FIIs, no such thing has happened till now.

This is keeping FIIs away from the markets. Currently nearly 50 per cent of FII money is estimated to be flowing in through tax haven Mauritius, and it would be directly impacted if GAAR was implemented. FIIs were quick to point out that India’s fiscal condition would be under pressure and equity markets may be headed to a severe decline if the GAAR was to be implemented.

The first two months of 2012 saw FIIs pumping in a little over Rs 36,000 crore into the country. However, the figures dropped to Rs 8,381 crore in March, during which various changes in tax laws were proposed in the Budget.

Reeling under the effect of these announcements, the FII investment turned out to be negative in April, pulling away Rs 301 crore, thus magnifying the effect of the uncertainty faced by foreign investors over Indian taxation laws. FIIs currently hold 17 per cent of the total market for Indian equities, equivalent to around $200 billion.

“It was a very atypical expiry day, as both volatility and volumes were down. Few incremental positions have got built up during this expiry. FIIs are keeping away from the market and even the domestic guys are not initiating much fresh trades,” said Yogesh Radke, head of quantitative research at financial services company Edelweiss Securities.

Futures contracts of the benchmark Nifty index saw a 68 per cent rollover or positions getting transferred to the May series of derivatives. Overall, 77 per cent of positions were rolled over to the next series.

“Though rollovers were high in percentage terms, in absolute terms only a few units have got rolled over. Most rollover activity was seen yesterday after the S&P reduced its outlook on India from stable to negative,” said Siddarth Bhamre, head of equity derivatives at Angel Broking.

He said the market trend looked bearish at the moment and asked his clients to initiate short positions on the Nifty.