Key Indian indices seem to have bucked the trend yet again, as they rallied while the Asian equity markets tumbled. Analysts and trade experts attribute this to a variety of reasons. Prime among them is the action in the futures and options market, a steady trend in overseas purchases and optimism that the policymakers will infuse more stimulus as inflation remains subdued.
At the moment, a sustained short covering is seen in the marketplace. Many investors, who had a strong negative opinion, are beginning to change their view and expect turbulence levels in markets to be lower than earlier estimated. This is reflected in the fact that Nifty December futures contract is trading at a premium of 23.25%.
Jitendra Panda, head, derivatives, Motilal Oswal Financial Services, said, “This is the first time in the last 3-4 months that Nifty futures premium has gone this high; it is only due to the short covering in the markets. Earlier, it used to be in the range of 8-9%. We assume that this premium indicates that there might be a short upward rally in the coming days.”
Added to this is the fact that the India VIX or volatility index has come down sharply from the 70% levels witnessed in mid-October to November to 44.91%. VIX indicates the expected market volatility over the next 30 days.
The strategy of selling short in the futures segment and then making them up in the cash market worked extremely well when markets were touching new bottoms every day. High volume selling by foreign institutional investors (FIIs) over several months accentuated benefits of this strategy. High net-worth individuals are seen to be big operators here.
According to data released by Sebi, the volume of contracts in the derivatives segment increased 42.06% to 1,698.7 lakh while turnover increased by 24.77% to Rs 3,317 thousand crore in July-September 2008-09 over April-June 2008-09.
Futures (index and stock futures taken together) constituted 67.20% of the total number of contracts traded in the F&O Segment. Stock future and index futures accounted for 35.26% and 31.94% respectively. Interestingly, client trading constituted 60.17%, propriety trading 31.07% and FII trading the remaining 8.76% of the total turnover, noted Sebi.
FII being net purchasers in the month of December, the strategy seems to have weakened and shorts are being covered vigorously. FIIs were net buyers at Rs 239.40 crore on Decmber 16, taking the net purchases to Rs 2181.70 crore. The 30-share Sensex of Bombay Stock Exchange (BSE) added 144.59 points or 1.47% to close the day at 9976.98 points. The broader S&P CNX Nifty of National stock Exchange (NSE) was up by 60.5 points or 2.03% and ended the day at 3,041.75 points.