are becoming more cautious about the Indian stock market, indicating a three-month rally may run out of legs despite retail traders growing optimistic, according to monthly derivatives data analysed by two brokerages. The Nifty 50 has risen about 12% from March through May, largely due to better-than-expected corporate earnings and easing global trade risks. That is nearly double the 6.6% gain in the MSCI Emerging Markets index in that time.

Foreign portfolio investors (FPIs) pumped $2.66 billion into Indian equities over that period and cut their short positions on the Nifty. A short seller borrows stock at a higher price betting its value will decline, at which point they buy the stock and pocket the profit.

However, FPIs have started the June derivatives series -- which runs from May 30 to June 25 -- with about $2 billion in Nifty index futures shorts, the highest since February, according to Nuvama Alternative and Quantitative Research.

In contrast, retail investors and high-net-worth individuals (HNIs), called the client category, turned bullish with long positions worth $1.54 billion on Nifty futures, compared with $546 million in shorts from early May.

"This divergence sets up a potential tug-of-war between institutional caution and retail optimism, and could lead to a brief pause in the market rally in June," said Abhilash Pagaria, head of Nuvama. Indeed, the Nifty's gains have weakened in each month -- from 6.3% in March to 3.5% in April and to about 2% in May. "Markets appear to be waiting for some concrete cues before turning bullish," said Sriram Velayudhan, VP at IIFL Securities.

Velayudhan expects the Nifty 50 to trade between 24,300 and 25,300 points over the June series, compared with its current level of about 24,800 points.

Analysts expect the Nifty to hit new highs by end-2025, but say a correction is likely in the next three months, according to a Reuters poll.