Trading interest in equity futures at 5-yr low

There was confusion on the Street after open interest in the domestic equity derivatives segment, which signifies trading positions, touched a five-year low on Thursday on monthly expiry of stock futures and options contracts.

Rollovers in the National Stock Exchange’s (NSE’s) S&P CNX Nifty index futures were abysmal. The open interest rollover in Nifty futures stood at just over 18.9 million shares on the expiry day — the lowest since November 2005.

“Investor interest is low, as there are more negative cues in the short term. Traders have not made money in the recent past, so positions will not be created when there are several events lined up,” said Motilal Oswal Financial Services, chairman, Motilal Oswal. The benchmark indices — BSE’s Sensex and NSE’s Nifty — have come down by over 3 per cent since Monday. Participation is low, as traders are limiting leveraged positions on the back of rise in cost of financing.

Combined open interest across all Nifty futures contracts before expiry on Thursday totalled 29.2 million shares, the lowest level since at least July 2008. Rollovers were at 45 per cent, compared with 53.6 per cent on June 29, the day before the end of the June series. The Reserve Bank of India (RBI) on Tuesday raised the repurchase rate to 8 per cent from 7.5 per cent and showed it was prepared to accept slower expansion to restrict inflation. RBI has increased rates 11 times since March 2010 and the high possibility that it would come back with more has scared the stock markets.

“After a higher-than-expected raise in interest rate by RBI, nobody is in the mood to take fresh positions. Caution is the word ahead of the crucial August 2 deadline for the US to raise its debt ceiling,” said Ajay Pandey, vice-president of institutional sales at Intime Spectrum Securities.

The US is debating over how to increase a $14.3-trillion borrowing limit by August 2. If the ceiling is not raised, the government would not be able to quickly meet payments for things like interest on its debt, welfare benefits and military pensions. The dollar would collapse, which would jolt global trade.

The dollar is the world’s reserve currency, as countries hold their debts in that currency. On default, financial crises would return with a vengeance to haunt the global economy, say traders.

There also are grave domestic concerns in the markets. “We expect a heated monsoon session of Parliament, which starts from August 1. The political situation is dicey because of the recent scams and allegations by former telecom minister A Raja. If important Bills and decisions are further delayed and there is no outcome on crucial matters in this session of Parliament, markets would further crack,” said Sudip Bandyopadhyay, CEO of Destimoney Securities. The volatility in equity market increases as traders are known to exploit the cash-based settlement system in the derivatives segment.

“Sentiment is poor as the Sensex is down nearly 700 points this week. Often, during such big events, it is seen that cash settlement process in the derivatives segment is exploited which increases the volatility, scaring traders away,” said Kishor Ostwal of CNI Global Research.

(With data inputs from BS Research Bureau)