Dalal Street expects rate cut by RBI next week; betting on banking stocks to outperform Nifty

MUMBAI: Traders in derivatives market have readied wagers ahead of the Reserve Bank of India’s (RBI) rate setting meeting next week. The bet is on banking stocks to outperform the Nifty as the central bank is expected to cut repo rates on Tuesday. Analysts said traders, as part of a pair strategy, have built long positions in Bank Nifty and short positions in Nifty.

Traders who initiated this strategy two weeks ago have already made a killing. Bank Nifty has surged 9.3% from its lows on September 9, while Nifty has gained 3.8% over the same period. On Wednesday, the Bank Nifty gained 1.32% to close at 17,255, whereas Nifty rose 0.43% to end at 7,845. Pair strategy is constructed involving two stocks or indices, where the trader takes long position on one and short on the other.

In a recent ET poll of thirty market participants including stock brokers, fund managers and strategists, 77% said they expected the RBI to reduce interest rates by 25 basis points; some are even betting on a 50 basis points rate cut.

Bank Nifty to Nifty Index ratio is currently at 2.19 times, which is lower than its ceiling of 2.30 times. Lower the ratio, better for the traders to create long positions on Bank Nifty and create shorts on Nifty. The ratio had fallen to about 2.08 times when Nifty had tested 7500 levels on September 7.

Analysts, in the October series, are expecting Bank Nifty to advance to 18,000 levels, and Nifty to 8,050 levels if the Reserve Bank of India (RBI) considers interest rate cut by at least 25 basis points. “The US Federal Reserve’s decision to hold rates has built a lot of expectations about the RBI’s monetary policy meeting and we have already seen that in price actions,” said Bhavin Desai, derivatives analyst at Motilal Oswal.

Traders created long positions and covered some of the short positions in banking stocks such as Union Bank, Axis Bank, Yes Bank, Bank of Baroda and IndusInd Bank in the past two weeks. These stocks have gained between 10 and 17% in the period. The more cautious traders have squared-off their positions ahead of Thursday’s futures and options (F&O) expiry, and long weekend with Friday being as holiday.