FIIs Raise Bearish Bets on Bank Nifty on Asset Quality Worries

Recent bounce-back fails to impress as weak rupee, loan recasts seen queering the macro pitch

Foreign investors have been building bearish bets on bank Nifty futures over the past month on concerns over their asset quality and a weakening rupee which could act as a spoiler to RBI cutting interest rates by adding to high inflation. 

Outstanding positions, or open interest (OI) on Bank Nifty futures, have increased by 52.56% since April 24, driven by FIIs' selling the index, whose price level has fallen by roughly 6% over the period, says an Angel Broking report citing market regulator Sebi data on FII exposure. 

These bets are now being rolled over, signalling FIIs' cautious-to-negative outlook on banking stocks despite the recent market bounce-back. 

The report makes the observation on the premise that FII exposure to index futures is restricted largely to Nifty and Bank Nifty futures, with other index futures such as IT, MiniNifty, PSE, and Infra being illiquid. While open interest in Bank Nifty futures has risen since April 24, that of Nifty has also risen but by a much lesser 9%, indicating that most of the shorts formed by FIIs in index futures were in Bank Nifty futures. 

"With so many sell positions built up, one could argue about Bank Nifty getting a leg up because of short- covering but that appears unlikely given the possibility of a further depreciation of the euro, which could affect the rupee-dollar equation," argued Siddarth Bhamre, Angel Broking's head of derivatives and the report's author. "There does not seem to be any trigger for short-covering to happen in a big way." Given the lack of any trigger for a trend reversal despite the recent market bounce-back, FIIs have been rolling over their bearish positions to the June series. 

According to Bhamre, bank Nifty has witnessed a 48.43% rollover ahead of Thursday's derivatives expiry, implying that FIIs are rolling over their shorts in the index. Loan restructuring is expected to touch a high of . 2 lakh crore by the current financial year-end (FY13), according to Crisil. The large quantum of restructuring reflects the prevailing stress on corporate India's credit quality because of lower profitability, weak demand and tight liquidity, the rating agency said. 

A weaker currency also affects banks' outlook as risk of imported inflation added to the already high inflation rate makes the central bank loathe to cut interest rates, which affects their profitability. 

"Shorts build-up has been witnessed in Bank Nifty futures and individual stock counters such as SBI, Axis, ICICI Bank and HDFC Bank," said Yogesh Radke, head of quantitative research, including derivatives research, Edelweiss Securities. "Despite the recent bounce-back in markets the perception of most investors and traders towards banking stocks remains cautious to negative because of the concerns on asset quality, global concerns and currency weakness." 

ram.sahgal@timesgroup.com