Surge in bank index futures positions

Open interest highest in 10 months, pushed by movement in G-Secs; also, perhaps by bullish expectations on RBI policy

The total of outstanding positions (meaning those not settled, also termed open interest) in the Bank Nifty index’s futures contracts jumped today to the highest level in 10 months, as traders mounted bullish bets to ride on the upward momentum in stocks.

Analysts said the heightened activity in these contracts was partly driven by the rise in government bond prices, which pushed the benchmark 10-year yield to a three-year low. The rally in government securities will boost banks’ bond portfolios and drive earnings, analysts said.

The optimism was sparked by the central bank governor’s comments that the inflation data in April, the slowest since 2009, will be factored into monetary policy decisions next month.  

The Bank Nifty rose 494.30 points or 3.9 per cent to close at 13,077.90, the highest closing level since November 2010. The PSU Bank index, of public sector lenders, jumped 4.2 per cent.

The open interest in Bank Nifty futures was roughly 2.55 million units today, provisional data showed.

“There was a huge build-up of long positions in Bank Nifty futures today, higher than the positions created when the index was around the same levels previously,” said Fortune Brokers’ technical and derivatives head, Ashish Chaturmohta. “The breakout of the 12,300-12,750 range has also been crucial.”

When the Bank Nifty touched 12,780 in late January, the open interest was about 1.1 million. In November 2010, when the index touched its high of 13,268, the total OI was 1.7 million. The highest of outstanding positions in Bank Nifty futures in recent years were 3.2 million units in September 2012 but then the index was around 10,300.

“Traders and investors bought bank stocks (mainly public sector) today on hopes of treasury gains from the ongoing rally in government bonds,” said Rajesh Cheruvu, chief investment officer, RBS Private Bank. “The recent reports of CRISIL and Icra on corporate debt restructuring points to the worst being over on the bad loan front.”

Traders are betting the Bank Nifty could rally to 13,200 in the near term. However, despite the optimism, the May futures were trading at a 165-point discount to the Bank Nifty index, as many lenders announced dividends in the fourth quarter.

Usually, futures contracts trade higher than the spot ones when the positions are bullish, moving into discount when the bets are bearish. When a company announces a dividend, traders prefer to buy the stock rather than its futures contracts. This is because holding futures do not earn dividends, unlike stocks. After a stock going ex-dividend, the gap between stock and futures contracts, in theory, narrows.

Some analysts said traders will square off their bullish bets in the run up to the Reserve Bank of India’s policy meet next month.

“The market might be reading too much into the governor's statement (today) on monetary policy. Unless consumer inflation mellows meaningfully, RBI is unlikely to cut rates sooner in a big way,” said Cheruvu.