The pace and quantum of foreign investors dumping Indian stocks for a China “hope trade” has dragged benchmark indices to the brink of a pullback—defined as a 5-10% fall from the peak over just four sessions through Friday. To top that, Indian benchmarks displayed their worst weekly performance in four-and-a-half years.

The Nifty50 and the 30-share Sensex continued their decline for a fifth straight day on Friday after a volatile session. The Nifty fell 0.93% to 25,014.6 points while the Sensex closed 0.98% lower at 81,688.45. On a weekly basis, the Nifty tanked 4.4% which was its worst showing since a 12% fall in the week ended 20 March 2020.

The biggest drags on the bellwether Nifty included HDFC Bank, Reliance, ICICI Bank, M&M and Bharti Airtel, which together accounted for three-fifths of Friday’s 235.50-point decline. HDFC Bank and Reliance have been the biggest contributors to the 1,164 point index pullback this week. FIIs sold a provisional   ₹9897 crore per BSE data on Friday. NSDL provides a figure with a lag of a day. 

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The market has fallen 4.8% from a record high of 26,277.35 last Friday, to 4 October’s level of 25,014.6. A fall of 5-10% from highs is termed a pullback, while a 20% decline is termed a correction and a contraction greater than 20% implies a bear market.

Derivatives data signal higher chances of a further drop next week on continued hot money flows to China and fears of a wider war breaking out in the Middle East, which can drive the Reserve Bank of India (RBI) to hold policy rates for longer, even as the US Fed cut borrowing rates on 18 September.

In three sessions of this month alone—data for Friday was not available until press time—FIIs sold shares worth ₹27,142.17 crore. This includes the single-biggest sale in a day of ₹15,506.35 crore, on Thursday, per NSDL data.

“The outflows are, in a sense, intended to keep the powder dry for China whose Shanghai Stock Exchange reopens Tuesday after the week-long national holiday,” said R. Venkataraman, chairman of IIFL Securities.

While other market veterans, including Nilesh Shah, MD of Kotak Mahindra AMC, said that some quantum of FII outflows ( from India) could be expected, thanks to the China ” hope trade “, ace investment manager GQG Partners’ Rajiv Jain isn’t buying such a trade. Jain was one of the few investors who bought stakes in Adani Group stocks at their low points last year after US short seller Hindenburg alleged corporate malfeasance against the group, which denied any wrongdoing.

Jain told Bloomberg that he had kept his holdings in China stocks at 12% of the $23 billion GQG Partners Emerging Markets Equity Fund despite the recent turnaround as he didn’t expect the recovery to persist.

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Derivatives signal further bearish sentiment. Nifty active futures contract open interest (OI or outstanding positions) expiring on 31 October has fallen from 1.63 crore shares to a provisional 1.42 crore shares between last Friday and 4 October as the index tanked. The decrease in OI along with the index fall indicates long liquidation—bullish FIIs cutting long positions at a loss.

Bank Nifty futures contract expiring on 30 October has seen OI jump over the same period from 18 lakh shares to 26.5 lakh shares as the index fell. This implies fresh short creation as an OI rise accompanied by a price fall implies bearish sentiment.

Option sellers have baked in a 3% range for next week with Nifty slated to trade between 24,633 and 25,367. The put-call ratio (PCR) of options expiring on 10 October stands at 0.44, which shows huge shorting of calls. Normally, PCR ranges between 1.2/1.3 and 0.75-0.8 .

The escalation of tensions in the Middle East has added fears that the RBI might hold its policy rate this year at 6.5% on fears of higher crude prices.