These traders — mostly wealthy ones and desks of institutions — have short-sold Bank Nifty futures and bought Nifty futures simultaneously in the past couple of weeks based on mathematical models.
“The strategy is on the assumption that Bank Nifty will relatively underperform the Nifty with RBI most likely to tighten rates,” said Siddarth Bhamre, fund manager, derivatives, Angel Broking.
The central bank is expected to hike the cash reserve ratio (CRR) — the minimum amount which banks need to deposit with RBI in cash — by 50 basis points later this month. The possibility of a hike in CRR has heightened after the robust industrial production figures for November showed that the worst may be over for the economy and the easy availability of cash will stoke inflation. Investors have taken note of the rate hike in China recently, as RBI’s actions, in the past couple of years, have been in line with that of China.
Market participants fear banks will be affected by a hike in CRR, as they (banks) will be forced to hike lending rates to protect margins. With lending yet to catch up with the growth rate of deposits in the banking system, it is feared that higher interest rates will hinder demand for loans. Also, rate hikes will erode the government bond portfolio of banks, as bond prices may fall on rate hikes. Yields on bonds and prices move in opposite direction.
While the outlook on bank stocks is cautious, as their business is directly linked to interest rate movements, market participants are less nervous about the negative impact of rate hikes on benchmark indices as the broader market has largely discounted the event.
A senior official at an institutional brokerage said, “The short Bank Nifty-long Nifty trading strategy is based on the expectation that Nifty will perform better than Bank Nifty in bullish times and will fall less faster than Nifty if the mood is bearish over the next few weeks.”
Since the start of the rally early March to date, S&P Nifty has risen 100% and Bank Nifty has gained close to 160%. But, since December 1, 2009, Nifty has gained 4%, while Bank Nifty has shed about 2%.
“Indian banks have underperformed the market over the past month; however, we remain cautious near term given uncertainties on growth, interest rates and profitability,” said Citigroup analysts in a recent report.
In the ongoing October-December quarter earnings season, the Citi expects Indian banks profit growth to decline sharply to 5% from the same period last year due to the statistical impact of a higher base in the previous year. Out of the past 10 quarters, the profit growth of banks has been over 30% in eight quarters, it said.