The Budget has been poorly received because it does very little to stimulate growth and it will also implicitly raise the cost of living for most people. Earlier in the same week, the Credit Policy was poorly received because it didn’t cut interest rates. A 0.75 per cent cut in cash reserve ratio (CRR) was well received but it didn’t make much of a difference to liquidity given the scale of government borrowing and the Reserve Bank of India’s (RBI’s) open market operations.
In the intermediate term of the next three weeks, the trend across most sectors is likely to be down. Optimists hope there would be a positive trigger in April if RBI finally cuts rates. However, the central bank has made it clear it is unwilling to offer easier credit while inflation is still high. It would be pragmatic to expect that policy rates will not change much, if at all, in April.
Under the circumstances, stocks of rate-sensitive sectors, such as banks, NBFCs, real estate and automobiles are likely to move down to a greater degree than the overall market. The Bank Nifty has demonstrated this high-beta behaviour. In the week since the Credit Policy, it lost over six per cent, dropping from close to 11,000 to below 10,200. This is much more than the Nifty itself over the same period.
This behaviour is consistent and likely to continue. The financial sector is historically high-beta with respect to the broader market. It will face pressure on several fronts. Credit offtake has slowed and may slow further, given the growth slowdown. Non-performing assets have risen and so have corporate debt restructuring referrals. If there isn’t a substantial rate cut in April, valuations across the financial sector could drop sharply.
As a trader, betting on the Bank Nifty is easy. It’s a highly liquid futures instrument. Cross-hedging it with Nifty option positions is also easy. If you’re using a trend following system, a short on the Bank Nifty is likely to be thrown up by any standard screening system. A vanilla position would be a short Bank Nifty, with say, a stop loss at around the 10,400 level. A hedger could buy long Nifty calls with strikes at around 5,400, or even 5,500, instead of, or in addition to a direct stop loss on the Bank Nifty.
The really aggressive trader would bet on financial stocks that are high-beta with respect to the Bank Nifty itself. For example, YES Bank, Axis Bank, IDFC and Reliance Capital are stocks with a history of outperforming the Bank Nifty in either direction. You could get exaggerated returns from shorting such stock futures. However, this is a volatile market and short-covering is guaranteed with the settlement approaching. So, keep disciplined stop-losses.
The author is an equity and technical analyst
