Nifty futures discount widens

This is the third month in a row where Nifty futures is trailing to the cash segment. On an average, futures quote at a discount of 20 to 25 basis points (bps) to the cash market. It, however, had widened further to touch 67 bps on Wedenesday.

On Friday, the Nifty futures closed at 2349.85 compared with the Nifty spot closing of 2361.20, a discount of 48 basis points.

Market sources attributed the trend to a rise in hedging positions. Operators were increasingly hedging their cash positions in the futures market in anticipation of a negative sentiment, said a broker.

Jitendra Panda of Motilal Oswal Securities says, "The present discount trend also represents hedging of positions in futures by those having positions in the cash market. The cash market saw a correction on Friday after nine days of upward spiral. More and more investors are entering into futures contracts of late, unlike earlier where only a select few investors used to take up futures positions."

"The Nifty futures has been trading at a discount for quite some time and the discount position is widening a bit more. The discount position, however, indicates caution on the part of market players, who are expecting the market to correct itself marginally at any time, given its continuous upward streak," Panda added.

As the Sensex has been scaling new peaks and the market gets cautious, players are hedging their positions in the futures segment more than before.

Usually, traders hedge about 30 per cent of their cash positions in the futures segment. The level now has, however, gone up to 35 to 45 per cent, brokers said.

Bharat Patel of Asit C Mehta Invesment Intermediates also concurred with the view. The widening of the discount in the futures' segment over the last two days may be a cause for concerns, but not immediately, he said. Ankur Agarwal of IDBI Capital Market Services, however, has a different view on the current discount level.

"A couple of months till last month, the situation was different when the companies were declaring dividends. When the companies declare dividends, the futures of such companies become ex-dividend. This leads to revaluation of futures lower by 10 to 15 basis points," he says, which explains the discount of Nifty futures when compared with Nifty cash.

"Now the dividends season is almost over. Still as long as the discount is only up to 20 bps, we cannot read much into it. But if the futures discount crosses this limit we can say that the futures market is indicative of an impending correction", he added. On Friday, the Sensex ended 43.08 points lower after nine successive sessions of upmove.