MUMBAI: Ahead of the RBI committee’s decision on interest rates, option sellers have baked in a 3.5% range for the Bank Nifty index post the policy announcement on June 7. The range for Bank Nifty is 34385-35615. The sellers have priced in a 35-50 bps hike in the repo rate and a hike in inflation forecast for FY23 from 5.7%.
However, a CRR hike or change in stance to neutral from accommodative could raise the volatility and subject the option sellers to huge losses. “If the sellers have baked in a 3.5% move, it’s based on expectations of no unexpected surprises,” said Hormuz Maloo, director, AFco Investments. “Option sellers normally make money at the expense of buyers, but with inflation being the buzzword, what the MPC does is anybody’s guess.”
A rise in interest rates normally helps banks who raise deposit rates with a lag compared to lending rates thus improving their margins. However, higher rates can also dissuade customers from spending, causing loan demand to slow.
“Along with the repo rate hike, the RBI will also revise its inflation estimates higher, possibly indicating inflation remaining close to 7% for the most part of CY2022,” said Suvox`deep Rakshit, senior economist at Kotak Institutional Equities.
“We expect the RBI to continue focusing on taking inflation and signaling its intent to continue raising the rate and normalising liquidity, while not entirely losing its on growth given the uneven nature of growth recovery.”
The put-call ratio of weekly Bank Nifty options expiring on June 8 stands at 0.58 which indicates that huge shorts have been created. If MPC’s actions meet market expectations there could be a spurt of short covering which drives up the Bank Nifty. The Bank Nifty is down 16% from its record high of 41829.6 on October 25 last year through Tuesday’s closing of 34996.