Bearish positions reverse bank share slide

Shares recoup early losses and end higher on short covering; opinion divided on likely trigger

 

The sizable bearish derivative bets on large private banks, including HDFC, ICICI and Axis, averted a possible crash in their shares after a tumble earlier on Thursday, sparked by money-laundering allegations.

These shares managed to shrug off early blues and ended firm after traders covered their short positions in bank index and stock futures created in the past few days. The Bombay Stock Exchange’s Bankex, which fell as much as 1.9 per cent earlier during the day, erased losses and ended almost two per cent higher.

A section of the market said the short covering was triggered by lower-than-expected core inflation, raising hopes of a policy rate cut next week. Another theory is that some ‘knowledgeable traders’, who had an inkling of the money-laundering expose well in advance, booked profits soon after the news broke out.

Bank Nifty futures of the March series had, till yesterday, seen a 47 per cent rise in open interest (OI) — the number of options and/or futures contracts not closed at the end of trading on a particular day -— since early March. OI in HDFC Bank rose 42 per cent, while ICICI has been a position build-up of 20 per cent.

Today, analysts said OI in these contracts declined earlier in the trading because of short covering but rose again to roughly yesterday’s closing levels, with the recovery in banking shares triggering a build-up of long positions.

“These short trades were by strong hands who used this news-based panic selling to exit their short position and come on the long side,” said Shashank Mehta, derivatives strategist, Shah Investor's Home.

Brokers said the creation of short positions in stock futures contracts of select banks in the past couple of days were ‘aggressive’. The market was abuzz with speculation that a group led by an operator banned by the markets regulator had bought bank Nifty put options at strikes way below the current market levels, indicating bearishness. Analysts said bank Nifty put options at a 11,700 strike price had seen a significant build-up in OI earlier this week.

“The bank Nifty came below this strike today, which has resulted in profit booking. The rebound in banks was primarily led by covering of short futures and squaring up of long bank Nifty puts,” said Amit Gupta, head-derivatives, ICICIdirect. The bank Nifty index, which closed at 12,020.75 on Thursday, had fallen to 11,566 earlier in the day.

A trader said some on Dalal Street had a whiff of the expose by website Cobrapost accusing banks of money laundering as early as Tuesday, though there was a lot of uncertainty about its impact on stocks.

“The conditions seemed almost perfect to make a killing. The final kill for bear traders (in banks) came from the Cobrapost report. The inflation data prompted them to cover their shorts,” said a broker, aware of some of the significant bearish bets in banks. “Had the inflation figure disappointed, the decline in banks would have been sharper.”

Wholesale price inflation rose 6.84 per cent in February after falling to a three-year low of 6.62 per cent in January. What cheered the market was that core inflation, an indicator of demand side pressures on prices, fell below four per cent for the first time in 35 months. Investors are now hoping the Reserve Bank cuts the repo rate by 50 basis points in its rate-setting meeting next Tuesday.