Nifty could scale 7,900 on rate cut

Global sentiment continues to look strong and domestic investors are banking on a rate cut at the Reserve Bank of India (RBI) policy review today. The recent uptrend has probably discounted a cut of 25 basis points in the repurchase rate. It may need a deeper cut or maybe a minimal 25 bps cut combined with a bullish speech from the RBI Governor to move the market a lot.

The Nifty is testing 7,800. A rate cut could push the index past the 7,900 mark. This would be crucial. The 200-Day Moving Average (200-DMA) is at around 7,900 and a move past that level would indicate a probable change in the long-term trend, from bearish to bullish.

Read more from our special coverage on "DERIVATIVE STRATEGIES"

Breadth has been good and there's been high volumes ever since the Budget. Domestic institutions have sold into the rally but the FIIs have been big buyers. The rupee has gained substantially since February 29.

The US Federal Open Markets Committee left rates unchanged and the Fed Chairperson has made several dovish statements. Global traders believe that money supply will continue to be easy. The Fed is not likely to hike rates more than twice in 2016. The Bank of Japan, the Bank of England and the European Central have all left rates unchanged.

The dollar has crashed against most currencies and the rupee has also gained due to strong FII inflows. A rate cut may cause some forex volatility. In theory, the rupee should ease down as its interest rate differential versus dollar (and other currencies) narrows. But, a rate cut may spark off even stronger FII inflows which would tend to push the rupee up.

The market slid 2,300 points or roughly 25 per cent in the 11-month bear market between its all-time high of 9,120 in March 2015 and its low of 6,825 on Budget Day. The 200-DMA is trending at around 7,900. A move beyond 7,900 would be very encouraging as it would suggest that the major trend has gone bullish again.

The Nifty Bank has run stronger than the overall market since it is more rate-sensitive. The Nifty Bank is now testing resistance at around 16,200. A strangle of long 15,500p (148) and long 16,500c (287) indicates the bullish nature of sentiment. The breakevens are at 15,065, 16,935. This may be too expensive but it's early in the settlement and big swings are likely. Other rate sensitive stocks could also swing a lot.

It may be unlikely but if RBI does not cut, or more likely, cuts minimally and makes a cautious statement, there could be massive bull unloading. The Nifty Bank could drop below 15,500 within two sessions in that negative/ neutral scenario.

Open interest (OI) in the Nifty call option chain for April has a big peak at 8,000c and then tapers off but there is good OI until 8,500c. The April put option chain peaks at 7,500p but there is a lot of OI down to 7,000p. The Nifty's put-call ratios are looking a little bearish at around 0.9.

The Nifty closed at 7,759 on Monday. A bullspread of long April 7,800c (119) short 7,900c (73) costs 46 and pays a maximum 54. A wider spread of long 7,900c (73), short 8,000c (41) is more attractive, costing 32 and paying a max 68 but this is 140 points from money. A bearspread of long 7,700p (91), short 7,600p (63) is acceptable, with a cost of 28 and maximum return of 72. The lower put premiums close to money indicate an over-bought market. The policy statement tomorrow should establish a clear trend. In that case, traders can follow that trend rather than take two-way positions.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel