FPIs’ short exposure in index futures has remained near 80 per cent or higher since July 2025. Photo Credit: iStockphoto
A wave of short covering by foreign portfolio investors (FPIs) helped push the Nifty 50 nearly 3 per cent higher on Tuesday after a surprise India-US trade agreement cut tariffs on Indian exports. Dealers said the positive news forced overseas investors, who were carrying record bearish positions in derivatives, to rapidly unwind shorts, but a flow reversal is yet to take shape.
Foreign investors had entered Tuesday’s session holding record bearish positions in index futures and options. Data showed FPIs were carrying a net short exposure of 8,26,636 index options contracts at the end of Monday’s trade, while net short positions in index futures alone stood at 2,27,144 contracts. Short positions accounted for nearly 90.8 per cent of their total derivatives exposure.
When markets surged following the announcement of the US-India trade deal that lowered tariffs on Indian exports, many of these large short positions were forced to close, intensifying buying pressure and pushing benchmark indices sharply higher.
Feroze Azeez, Joint CEO of Anand Rathi Wealth Ltd, said the rally was primarily a technical reaction to positioning rather than a shift in sentiment. “Foreign investors had built very large short positions in index futures ahead of the Budget. When the market unexpectedly rallied because of the US-India trade deal announcement, many of these positions were quickly closed, leading to short covering and adding to the upward move.”
“While the price action indicates meaningful short covering rather than simple unwinding, long-term reversal still hinges on corporate earnings, macro environment and global stability,” he said.
Nifty50 surges
The Nifty 50 surged 639.15 points or 2.55 per cent to settle at 25,727.55, while the Sensex soared 2,072.67 points or 2.54 per cent to close at 83,739.13, marking its biggest single-day gain in terms of points since November 22, 2024. Despite a strong opening rally, markets cooled from the day’s highs, indicating that panic-driven short covering was limited, analysts said.
Anand James, Chief Market Strategist at Geojit Investments Ltd, said that FPIs’ short exposure in index futures has remained near 80 per cent or higher since July 2025. “A structural shift in FPIs’ positioning will need a few more days to get established. We have seen several instances of brief easing, only to return to heavily short levels soon after,” he said.
However, provisional data from the NSE showed FPIs were net buyers of ₹5,426 crore in the cash market on Tuesday, while domestic institutional investors bought ₹345 crore, indicating that some fresh buying accompanied the derivatives covering.
While the finalization of the long-drawn trade deal invites some foreign inflows into the Indian equity market, FPIs remain cautious and await recovery in corporate earnings.
Published on February 3, 2026