FII Index Futures Shorts Near Record High Post-Budget: Rebound or Breakdown?

• Foreign institutional investors (FIIs) hold near-record net short positions in Indian index futures post-Budget, indicating continued caution.
• FII net short positions peaked at 2.27 lakh contracts on January 23 and remained high at 1.94 lakh contracts by January 30.
• This aggressive foreign hedge build-up is the most significant in a decade, signaling a defensive stance.
• Unlike past instances where extreme FII shorts acted as a contrarian signal, this time the positioning has been directional, similar to the pre-Covid period.
• The government's Budget 2026 decision to raise Securities Transaction Tax (STT) on derivatives further dampened market sentiment, potentially reducing trading volumes by 20-30%.

Why It Matters: FIIs maintain record-high short positions post-Budget, coupled with increased STT, signaling market caution and potential volatility.