The Reserve Bank of India (RBI)'s unexpected monetary easing on Friday sent shockwaves through the market, triggering a massive sell-off of Nifty put options. This dramatic shift strongly suggests a significant upward trajectory for India's benchmark stock index when trading resumes on Monday.
The RBI's Monetary Policy Committee (MPC) delivered a clear pro-growth signal, slashing the benchmark repo rate by a substantial 50 basis points (bps) and reducing the cash reserve ratio (CRR) by a whopping 100 bps. This bold move spurred traders to aggressively sell put options at the Nifty's 25,000 level, a clear indication of anticipated market gains.
Expert Opinions: A Bullish Consensus
Market analysts echo this bullish sentiment. Sriram Velayudhan, senior vice-president at IIFL Capital Services, stated: "The outsized cuts in the repo rate and the unexpected significant easing of the CRR have given a bullish texture to the market. We expect fresh buying in rate-sensitives, which will prop up the market. The sale of ATM (at-the-money) puts reflects the high confidence of traders."
Rajesh Palviya, SVP (head of derivatives & technical research) at Axis Securities, agrees, calling the put writing at the Nifty's current level a "very bullish sign." He revised his Nifty range to 24,900-25,500 from 24,500-25,100 post-RBI action, noting an immediate bias towards the higher end.
Understanding the Signals:
The increased selling of put options relative to call options is a classic indicator of bullish market sentiment. Traders profit from the premiums paid by put buyers who are either speculating on market movements or hedging against potential volatility. Conversely, increased call option selling signals bearish expectations.
Market Reaction and FPI Activity:
The Nifty closed Friday 1% higher at 25,003.05, following the RBI's announcement. Foreign portfolio investors (FPIs) trimmed their short index futures positions, while domestic institutional investors (DIIs) and retail investors booked some profits on bullish index futures positions. Despite some recent net selling, FPI activity has shown a significant shift towards net buying in recent months.
Positive Outlook:
Jyoti Jaipuria, founder of PMS firm Valentis Advisors, shares the bullish outlook, believing the rate cut and CRR reduction will stimulate consumption demand and improve earnings growth, particularly for small-cap companies in specific sectors.
