Volumes spurt in Bank Nifty on news flow; average daily turnover rises 27%

Traders are making the most of the hectic news flow in the banking sector. The daily average volume for the Bank Nifty index in March rose 27 per cent over the previous month and was 41 per cent more than the January turnover, according to the National Stock Exchange (NSE) data.

In March, the average daily turnover (ADT) of the Bank Nifty index in the futures and options (F&O) segment stood at Rs 5.3 trillion. In comparison, the ADT for the index, a gauge for the performance of banking stocks, in February stood at Rs 4.2 trillion and was Rs 3.7 trillion in the preceding month.

Market participants said investors had been increasing their short-positions in the index from February amid the spate of negative news flow. The trading activity saw a spurt after a Rs 130-billion fraud at state-owned Punjab National Bank (PNB) came into light. The buoyancy in trading continued amid negative news flow surrounding ICICI Bank and Axis Bank and tightening of non-performing asset (NPA) disclosure norms by the Reserve Bank of India (RBI).

The Bank Nifty fell a little more than 10 per cent during the two months.

“The speculative position in the derivatives market increases whenever there is heavy news flow around a company or a sector. In this case, the banking sector received multiple blows in the form of overall NPA numbers, PNB fraud and ICICI episode. Hence, investors took heavy positions in the banking index based on their assessment of the situation,” said G Chokkalingam, founder, Equinomics Research & Advisory.

A large part of the F&O bets were on account of hedging given the large exposure to the sector.

The Bank Nifty is the most-traded product among index options. It accounts for 65 per cent of the total index options volume, higher than even the benchmark Nifty (contributes 34 per cent).

The Bank Nifty index has a high-beta — it typically gains or falls more than the Nifty index.

After a sharp rally last year, banking stocks have come under pressure due to the negative news flow.

PNB, the country’s second-largest public sector bank (PSB), informed the bourses on February 14 that a fraud worth Rs 114 billion was reported in its system. In a complaint to agencies, the bank had alleged that diamond merchant Nirav Modi, with the help of some PNB employees, allegedly defrauded the bank. Subsequently, the bank revised the fraud amount to Rs 130 billion. The news created a panic among investors who feared other PSBs could also have exposure to the fraud. The PNB stock slumped close to 40 per cent since February.

Another blow to banking stocks came in the form of an alleged quid-pro-quo in the Rs 32.5 billion loan extended to Videocon by ICICI Bank. Investigative agencies are currently looking into the possible nexus between Videocon and Deepak Kochhar’s NuPower Renewable Energy. Deepak Kochhar is the husband of ICICI Bank Managing Director and Chief Executive Officer Chanda Kochhar.

Market experts’ trading activity in the Bank Nifty will continue amid announcements of the March quarter results.

Analysts are predicting that the earnings will remain muted for the quarter ended March. “The provisioning figures could go up further in the reporting quarter. It will take another two quarters for the NPA cycle to bottom out. Investors should prefer retail-focused private banks for investment opportunities,” said a broker.