Foreign funds' bearish contracts on Indian equities remain near last year's record levels, signaling sustained pessimism among overseas investors. The Mideast flareup has compounded concerns, potentially triggering further capital outflows from India's markets.

Foreign funds have maintained aggressive short positions through index futures, reflecting doubts about valuation premiums and geopolitical stability. These bets, concentrated in Nifty 50 and Bank Nifty derivatives, suggest institutional investors are hedging against a correction rather than exiting outright.

Market strategists note that while domestic inflows have provided a buffer, the persistence of bearish contracts above 80,000 contracts limits upside momentum. A escalation in Middle East tensions could accelerate unwinding, pressuring the rupee and widening current account deficits.