Trends in the next two sessions will certainly revolve around the Reserve Bank of India (RBI) and US Fed policy reviews. As of now, the sentiment is negative. Let's discuss the consensus expectations regarding the RBI first.
In its previous action, the RBI raised the repurchase (repo) rate in response to signals of higher inflation. Since both the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have trended higher in the latest data releases, consensus expectations is that most people expect the RBI to follow up with a repo increase of at least 25 basis points. There are those who argue the case for a 50 basis points rise, or for a 25 basis points increase allied to a raise of the cash reserve ratio (CRR).
There will be a relief rally if the RBI doesn't raise rates at all. There may even be a relief rally if the RBI only raises repo by 25 basis points and doesn't touch CRR. A bigger rate rise of 50 bps or perhaps, a rise of 25 bps plus a hike in CRR could both trigger off sharp corrections.
Most Fed watchers believe tapering will definitely start by March. A fair number believe tapering will start by January. Some hawks believe it might start by December-end itself.
If the Fed doesn't taper in January, I think there will be a small relief rally. It might not be a large one, due to the fear that tapering will start by March.
If the Fed decides to taper in January, the dollar will harden and there will be some downwards pressure on emerging market equities, including in India. If the Fed decides to taper in December itself, there will be a crash, even if the tapering is done in minute increments.
As of Tuesday, the Bank Nifty is trading in the range of 11,200-11,400. We can reasonably expect a 500-600 points session tomorrow (in terms of high-low range) and maybe, an equally large session on Thursday, going by historical behaviour in earlier RBI policy reviews.
This means the Bank Nifty could swing down till around 10,200 or lower over the next two sessions if a big downtrend is established. It could also rise till around 12,200 or higher. My best guess, which could be entirely wrong, is that a downtrend is more likely than an uptrend.
A maximising strategy involves setting a stop loss at around 11,500 and shorting the futures. This is a significant loss - it would amount to around Rs 7,500-plus loss per futures lot (on a margin of around Rs 25,000) if the stop loss is hit. Of course, if the stop is hit or exceeded, the trader should consider going reversing and going long with a double plus.
A less risky two-way strategy to play the situation is to strangle with Bank Nifty options. A long 11,000p (149) and long 11,500c (128) costs roughly 280. The strike of the put is nearer the actual price. This would breakeven in theory, if the index dropped to 10,720, or rose to 11,780. In practice, if the option at either end was struck, the losing option could be booked, improving the return.
Another method would be to short the Bank Nifty index futures and hold a long 11,500c as a hedge. This goes into profit below the 11,075 level roughly. Again, in practice, the losing option could be booked, increasing the returns. Obviously the opposite strategies, (going long futures with a stop loss at 11,000 or with a hedge of long 11,000p ) can be employed by traders who believe the index is due for a bounce.
The author is a technical and equity analyst
In its previous action, the RBI raised the repurchase (repo) rate in response to signals of higher inflation. Since both the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have trended higher in the latest data releases, consensus expectations is that most people expect the RBI to follow up with a repo increase of at least 25 basis points. There are those who argue the case for a 50 basis points rise, or for a 25 basis points increase allied to a raise of the cash reserve ratio (CRR).
There will be a relief rally if the RBI doesn't raise rates at all. There may even be a relief rally if the RBI only raises repo by 25 basis points and doesn't touch CRR. A bigger rate rise of 50 bps or perhaps, a rise of 25 bps plus a hike in CRR could both trigger off sharp corrections.
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Consensus on the US Fed's tapering of the quantitative easing programme is more difficult to assess. It is also more important since it will affect both the dollar-rupee and the generic attitudes of foreign institutional investors (FIIs) to all emerging markets.
Most Fed watchers believe tapering will definitely start by March. A fair number believe tapering will start by January. Some hawks believe it might start by December-end itself.
If the Fed doesn't taper in January, I think there will be a small relief rally. It might not be a large one, due to the fear that tapering will start by March.
If the Fed decides to taper in January, the dollar will harden and there will be some downwards pressure on emerging market equities, including in India. If the Fed decides to taper in December itself, there will be a crash, even if the tapering is done in minute increments.
As of Tuesday, the Bank Nifty is trading in the range of 11,200-11,400. We can reasonably expect a 500-600 points session tomorrow (in terms of high-low range) and maybe, an equally large session on Thursday, going by historical behaviour in earlier RBI policy reviews.
This means the Bank Nifty could swing down till around 10,200 or lower over the next two sessions if a big downtrend is established. It could also rise till around 12,200 or higher. My best guess, which could be entirely wrong, is that a downtrend is more likely than an uptrend.
A maximising strategy involves setting a stop loss at around 11,500 and shorting the futures. This is a significant loss - it would amount to around Rs 7,500-plus loss per futures lot (on a margin of around Rs 25,000) if the stop loss is hit. Of course, if the stop is hit or exceeded, the trader should consider going reversing and going long with a double plus.
A less risky two-way strategy to play the situation is to strangle with Bank Nifty options. A long 11,000p (149) and long 11,500c (128) costs roughly 280. The strike of the put is nearer the actual price. This would breakeven in theory, if the index dropped to 10,720, or rose to 11,780. In practice, if the option at either end was struck, the losing option could be booked, improving the return.
Another method would be to short the Bank Nifty index futures and hold a long 11,500c as a hedge. This goes into profit below the 11,075 level roughly. Again, in practice, the losing option could be booked, increasing the returns. Obviously the opposite strategies, (going long futures with a stop loss at 11,000 or with a hedge of long 11,000p ) can be employed by traders who believe the index is due for a bounce.
The author is a technical and equity analyst