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The Reserve Bank of India's (RBI) unexpected monetary easing on Friday has sent ripples through the market, igniting a surge in optimism among traders and investors. The surprise move, characterized by a significant 50 basis points (bps) cut in the benchmark repo rate and a 100 bps reduction in the cash reserve ratio (CRR), has been interpreted as a strong signal of the central bank's commitment to fostering economic growth. This decisive action has triggered a wave of selling in Nifty put options, indicating a widespread belief that India's benchmark stock index is poised for a substantial upswing when the market reopens on Monday. The sheer magnitude of the put option selling underscores the confidence among market participants that the RBI's policy intervention will have a positive impact on the equity markets. Open interest (OI) in Nifty's weekly 25000 strike put, expiring on Thursday, witnessed an astounding increase of 470% to reach 83,472 contracts on Friday following the policy announcement. This exponential rise in OI is a clear indication of the bullish sentiment prevailing in the market, as traders rush to capitalize on the anticipated gains. The sale of put options signifies a belief that the underlying asset, in this case, the Nifty, will rise in value, allowing the option sellers to profit from the premiums paid by the put buyers. The scale of this activity suggests a strong conviction among traders that the RBI's measures will effectively stimulate economic activity and boost corporate earnings, leading to a sustained rally in the stock market. Several market experts have echoed this optimistic outlook, emphasizing the potential for a significant market upmove in the wake of the RBI's policy announcement. Sriram Velayudhan, Senior Vice-President at IIFL Capital Services, highlighted the RBI's unexpected action as a fresh trigger for the markets, stating that the outsized cuts in the repo rate and the significant easing of the CRR have imparted a bullish texture to the market. He anticipates fresh buying in rate-sensitive sectors, such as financials and IT, which are currently underweight in most mutual fund portfolios. This influx of investment is expected to further propel the market upwards. Velayudhan also pointed to the sale of at-the-money (ATM) puts as a signal of bullishness, indicating a high level of confidence among traders. ATM options, which trade at or close to the current market price of the underlying asset, are particularly sensitive to short-term price movements. The widespread selling of ATM puts suggests that traders are not only confident that the market will rise, but also that it will do so in the near future. This immediate bullish outlook further reinforces the notion of a significant market upmove in the coming days. Rajesh Palviya, SVP (Head of Derivatives & Technical Research) at Axis Securities, concurred with Velayudhan's assessment, describing the writing of puts at the same level as the Nifty as a very bullish sign. He raised the range for the Nifty to 24900-25500 from 24500-25100, reflecting the anticipated positive impact of the RBI's actions. Palviya believes that traders have already factored in a range of 24670-25330 for the Nifty this week, with an immediate bias towards the upper end of the range. This upward revision of the Nifty's trading range underscores the widespread expectation of a significant market upmove in the short term.
The dynamics of options trading provide further insight into the prevailing market sentiment. Traders typically sell more put options relative to call options when they anticipate a rise in market prices. This strategy allows them to pocket the premiums paid by put buyers, who are either speculating on a market decline or hedging their portfolios against potential volatility. Conversely, traders tend to sell more call options than put options when they expect market prices to fall. The surge in put option selling following the RBI's policy announcement is a clear indication that traders are overwhelmingly bullish on the market's prospects. This bullish sentiment is further supported by the Nifty's closing performance on Friday, which saw the index rise by 1% to 25003.05. This gain was fueled by the RBI's decision to cut the repo rate by a greater-than-expected 50 bps to 5.5%, exceeding the market estimate of 25 bps. The central bank also reduced the CRR by 100 bps in tranches to 3%, further easing liquidity in the market. In addition, the policy panel shifted its monetary policy stance from accommodative to neutral, signaling a more flexible approach to managing inflation and supporting economic growth. While domestic investors appear to be largely bullish, there is some divergence in the positioning of foreign portfolio investors (FPIs). FPIs trimmed their short index futures positions to 92730 contracts on Friday, down from 106,988 contracts a day earlier. This reduction in short positions suggests that FPIs are becoming less bearish on the Indian market, but they have not yet fully embraced the bullish sentiment prevailing among domestic traders. Retail and high net worth individuals (HNIs) also booked some profits on their bullish index futures positions, reducing these to a net long of 61524 contracts on Friday from 68669 net long contracts on Thursday. This profit-taking behavior is not necessarily indicative of a negative outlook, but rather a prudent strategy to lock in gains after a period of strong market performance. Despite the cautious positioning of some FPIs and HNIs, the overall trend suggests that the market is poised for further gains. FPIs have turned net buyers of Indian shares since mid-April, as the dollar weakened and US bond yields fell. This influx of foreign capital has contributed to the Nifty's recovery from a low of 23519 in March to 24751 by the end of May. The continued inflows of foreign investment are expected to provide further support to the market in the coming weeks.
However, it is important to note that FPIs turned net sellers worth ₹12,077 crore in the month through June 5, according to NSDL data. This selling pressure may have tempered the market's enthusiasm to some extent. Nonetheless, BSE data indicates that FPIs net purchased shares worth a provisional ₹1009.71 crore on Friday, suggesting a potential shift back towards a more positive outlook. Domestic institutional investors (DIIs) have played a crucial role in absorbing FPI selling at lower levels, net buying ₹3.75 trillion worth of stocks between October last year and March this year. Their continued buying of ₹1.2 trillion since March end to June 6 has further supported the market's recovery. The strong participation of DIIs is a testament to their confidence in the long-term growth prospects of the Indian economy. Jyoti Jaipuria, Founder of PMS firm Valentis Advisors, is firmly bullish on the markets following the RBI's policy announcement. She believes that the rate cut and CRR reduction could spur consumption demand, leading to better earnings growth. Jaipuria is particularly bullish on small-cap companies in the financial, chemicals, pharma, and engineering segments. This focus on small-cap companies reflects a belief that these companies are well-positioned to benefit from the expected increase in domestic demand. In conclusion, the RBI's surprise monetary easing has ignited a wave of optimism in the Indian stock market. The surge in put option selling, coupled with the positive commentary from market experts, suggests that the Nifty is poised for a significant upmove when the market reopens on Monday. While there are some dissenting voices and cautious positioning among certain investor groups, the overall trend points towards a sustained rally in the coming weeks. The RBI's commitment to fostering economic growth, combined with the strong participation of both domestic and foreign investors, bodes well for the future performance of the Indian equity market. The potential for increased consumption demand and improved corporate earnings further reinforces the positive outlook. However, investors should remain vigilant and monitor market developments closely, as unforeseen events and shifting economic conditions could impact the market's trajectory. The interplay between FPI and DII investments will be critical to follow and may point towards bullish or bearish undertones within the market.