BackNarendra Modi budget looms over record Nifty as volatility jumps
The CNX Nifty index has climbed 41% during the past 12 months as oil plunged
Premium
Mumbai: As Indian stock investors propel Asia’s fourth-biggest market to an all-time high, options traders are preparing for a retreat.
The CNX Nifty index has climbed 41% during the past 12 months as oil plunged, the central bank cut interest rates for the first time in 20 months and investors speculated Prime Minister Narendra Modi will unveil measures to boost growth in his annual budget on 28 February . By contrast, options traders have boosted the number of bearish put contracts to a 14-month high versus calls and pushed the India VIX, a gauge of anticipated price swings, to the highest level since July.
The options market is signaling greater odds of a selloff in stocks after the Nifty index’s valuation climbed to a four- year high and the gauge’s relative strength index increased to levels that signal gains are overdone. Next month’s budget may be the trigger for losses, according to Kotak Securities Ltd.
“The budget expectation is so huge that no matter what the finance minister does, there can be scope for feeling letdown," Sahaj Agrawal, a vice president of derivatives at Kotak, said in a phone interview from Ahmedabad in western India. “We expect volatility to rise before the event."
The ratio of outstanding Nifty puts to calls climbed to 1.41 on 21 January the highest since October 2013, before slipping to 1.38 on Friday. The number of puts has increased 14% during the past month to 3.07 million, compared with the 20-day average of 2.24 million, data compiled by Bloomberg show. The Nifty index added 0.1% to 8,846.3 at 11:27 am in Mumbai on Tuesday, set for a fifth day of record.
Budget expectations
Puts with the highest open interest have a strike price of 8,000, or about 10% below the Nifty’s last close of 8,835.60 on 23 January. The India VIX climbed 3.5% last week. Indian markets were closed for a holiday yesterday.
The nation’s stocks have added almost $350 billion of value since Modi won the biggest election victory in three decades on 16 May. Gains accelerated after the Reserve Bank of India cut borrowing costs on 15 January and Brent crude dropped 57% since June. The tumble in oil prices will help cut India’s annual import bill by $50 billion, according to the RBI.
“The VIX has picked up but it is doubtful it will rally above 20 by the end of February," Raghu Kumar, the co-founder of brokerage RKSV, said in a phone interview. “There just isn’t enough happening to validate a huge increase in volatility."
Relative value
Inflows from overseas are keeping Indian stock prices elevated and any disappointment from the budget could “spook" investors, R.K. Gupta, managing director at Taurus Asset Management Co., said by phone from New Delhi.
Tax reforms, revenue targets and a reduction in bureaucracy are among elements of the budget that will be watched closely by investors, Dipen Sheth, the head of research at HDFC Securities Ltd., said in a phone interview from Mumbai.
Modi has struggled to secure approval from lawmakers in the upper house for proposals to spur land purchases and boost investments in the insurance and coal industries. That’s prompted him to use temporary orders instead, which still need parliamentary approval to become permanent.
Foreigners bought a net $890 million of local shares since 1 January, adding to last year’s $16 billion of purchases, data compiled by Bloomberg show.
The Nifty trades at 16.3 times estimated earnings for the next 12 months, a 40% premium over the MSCI Emerging Markets Index. The Indian stock gauge’s 14-day RSI increased to 73.5 on 23 January, above the threshold of 70 that some traders use as a signal gains are overdone.
“The market has rallied on the back of liquidity, and not much on the fundamentals," Taurus Asset’s Gupta said. “Stock valuations are showing signs of fatigue." Bloomberg
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
