The banking and financial sector could be due for a burst of speculation. At the policy review on April 7, the Reserve Bank of India (RBI) held policy rates and Cash Reserve Ratio steady. The Governor, Raghuram Rajan, said he wanted banks to cut commercial rates. The latest inflation numbers show retail inflation is under control and could be trending down.
So, banks could hope for another policy rate cut. But they must cut rates first. State Bank of India (SBI) and ICICI Bank have already cut rates by token amounts. Credit offtake has also been very low across the sector. Non-food credit growth is at 20-year-lows, at just about 10 per cent growth. Rate cuts could drive credit volumes.
The fundamentals are hard to judge. We could soon get some sense of trends as Q4 results come in. Banking has been hit hard by years of growth recession, rising sticky debts and record restructurings. Balance sheets are not in great shape, with close to 10 per cent of total assets being impaired.
Share prices are at interesting levels. If the SBI and ICICI cuts are emulated by other banks, there could be positive sentiment. On the other hand, poor Q4 numbers could lead to hammering. The Bank Nifty index is high-beta and highly correlated to the Nifty. In the last two weeks, the Nifty (up three per cent since April 1) has slightly outperformed the Bank Nifty (up 2.8 per cent in April). This situation is unlikely to hold for long. The Bank Nifty will either overtake the Nifty or banking will pull the Nifty down if it goes negative, since banks contribute a big weight.
The Bank Nifty has hit resistance at 19,000 levels and found support at 18,500. Breakouts beyond either 19,000 or 18,500 could give the index a clear run till at 19,500 or higher or pull it down till 18,000 or lower.
The Bank Nifty often sees two per cent (350-400 points) spread between high and low in a given session. When it trends, it can climb or drop 1.5- two per cent (300-400 points). This means a move till 19,500 or till 18,000 could be only two or three trending sessions away.
If you have a view, there are many ways to create long or short positions. The aggressive trader can focus on high-beta bank stock futures. The less aggressive trader could go long or short in the Bank Nifty futures, with a trailing stop-loss.
A hedger who uses options may go long (or short) in the futures and buy a put (or buy a call). The trader with a view might also take a bullspread with long 19,000c (194), short 19,500c (68). This costs 126 and it could pay a maximum of 374 on an uptrend. Or, he may take a bearspread of long 18,500p (225), short 18,000p (100). This costs 125 and could pay a maximum of 375 on a downtrend.
The hedger who is playing for a breakout in either direction might combine both positions. That is, a long strangle of long 18,500p (225) and long 19,000c (194), offset with a short strangle of short 18,000p (100), short 19,500c (68). This costs 251, and it could pay maximum of 249 (neglecting brokerage). An even money risk:reward ratio is not very attractive however, since there might not be a breakout.
My inclination would be to take a long 18,000p (100) and a long 19,500c (68). If there is a breakout, this wide strangle will pay handsomely. It should also be possible to exit the position without big losses if there is no breakout.
