Modi Budget Looms Over Record Nifty as Volatility Jumps: Options
By Santanu Chakraborty
(Bloomberg) — 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 percent 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 Feb. 28. 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 Jan. 21, the highest since October 2013, before slipping
to 1.38 on Friday. The number of puts has increased 14 percent
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 percent to 8,846.3 at 11:27 a.m. in Mumbai
today, 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 percent below the Nifty?s last close of
8,835.60 on Jan. 23. The India VIX climbed 3.5 percent 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
May 16. Gains accelerated after the Reserve Bank of India cut
borrowing costs on Jan. 15 and Brent crude dropped 57 percent
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
Jan. 1, 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 percent premium over the MSCI Emerging
Markets Index. The Indian stock gauge?s 14-day RSI increased to
73.5 on Jan. 23, 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.?