What are traders doing ahead of RBI’s Monetary Policy meeting?

Smart traders in anticipation of a rate hike have already buildup short positions in the financial stocks as the spread between the 10 year G-Sec and RBI repo rate widens.

Jun 06, 2018 04:06 IST India Infoline News Service Jayesh Bhanushali |

RBI’s second bi-monthly Monetary Policy meeting of 2018-19 will be held from June 4-6, 2018, with the MPC announcing the policy on Wednesday i.e June 06, 2018 at 2:30 pm. The Reserve Bank had previously tinkered with the interest rates way back in August 2017.  
 
The Monetary Policy Committee (MPC) had decided to keep the repo rate unchanged at 6% in its last meet but highlighted its cautious view on rising inflation. The objective of the MPC has been to maintain the near-term consumer price inflation at 4% within a band of +/- 2 percent while supporting growth.
 
Following is the voting outcome of the previous meeting by the MPC members.
 
 
Since its last Monetary Policy meeting held on April 05, 2018, following key economic developments have resulted into rise in inflation, which could add on to an expectation of a rate hike:
 
a) Crude oil prices have surged by nearly 7%, which has resulted into sharp spike in domestic petrol and diesel prices that would lead to a sharp surge in consumer price index reading.
 
b) Heavy selling pressure has been witnessed by Foreign Portfolio Investors (FPI), dumping $6.6 billion of India debt and equities in the financial year 2018-19 due to concerns of fiscal deficit ballooning, which has added humongous pressure on the domestic currency.
 
Key indicator of a rate hike
 
The key indicator is the spread between 10 year G-Sec and RBI repo rate.
 
The gap between the 10-year government bond yield and the RBI’s benchmark repurchase rate widened to 178 basis points as of June 04, 2018, which is nearly at the highest point since the last 5 years. A winding of spread is usually witnessed at the start of the tightening of a rate cycle.


The 10 year G-Sec- RBI repo rate spread has been a reliable indicator in the past.

Difference in Basis

Date

Action

326 Basis

2010 March

Rate hike

199 Basis

2013 Sep

Rate hike

178 Basis

2018 June

Rate hike expected by market


Smart traders in anticipation of a rate hike have already build-up short positions in the financial stocks.
 
Following is the list of stocks that have witnessed a build-up of short position since the start of the June F&O series.

Change in Oi since Expiry
Underlying OI Future Price Current OI Change in OI since Expiry (%) Change Price (%)
ALBK 14880000 41.15 15801000 6 -2.67
ANDHRABANK 19380000 36.6 20727000 7 -3.69
BAJAJFINSV 662875 6003 671250 1 -1.77
BANKINDIA 24642000 99.15 26406000 7 -2.12
BHARATFIN 5615000 1175.85 5711000 2 -1.65
CANBK 12942400 258.5 13229200 2 -0.89
CANFINHOME 4365000 380.8 4660000 7 -4.54
CAPF 8562400 569.85 8722400 2 -0.61
DCBBANK 7038000 186.35 7317000 4 -2.31
FEDERALBNK 75922000 85.3 76813000 1 -2.29
IDBI 54540000 66 58790000 8 -3.03
IDFC 150427200 51.1 151681200 1 -2.94
IDFCBANK 190133000 41.25 196396000 3 -0.48
INDIANB 2686000 327.7 2858000 6 -0.27
ORIENTBANK 13572000 81.1 14496000 7 -3.02
PNB 67032500 84.1 68386000 2 -0.77
RBLBANK 3839400 514 4044200 5 -0.75
RELCAPITAL 9438000 420.3 9744750 3 -1.28
SBIN 71943000 269.05 72498000 1 -0.41
UNIONBANK 29176000 91 30014000 3 -1.76
YESBANK 45946250 343.75 47470500 3 -1.11

Note: Open interest (OI) is the total number of outstanding contracts that are held by market participants at any point in time. It can be used to gauge & identify intermediate trend of underline securities in future and options market.

Price and Open Interest general rule:

PRICE OPEN INTEREST MARKET OUTLOOK
Decrease Increase Short buildup


Impact of rate hike on the consumers:

Negative impact
 
  • A hike in repo rate has a negative impact on consumption and dampens the sentiment in market making it tough for banks to expand their loan book.
  • A hike in repo rate would increase the mortgage rates on home loans, impacting the housing demand.
  • A hike in repo rate would increase the cost of capital for the corporates, resulting into higher interest cost impacting their profitability.

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