India Bank Futures Return to Premium Amid Rate Cut Speculation

Updated on

Futures on a gauge of Indian banks climbed to the highest level in three weeks against the underlying index, amid speculation that the central bank will lower interest rates next week, spurring a rally in lenders.

CNX Bank Nifty Index futures for June delivery rose 1.5 percent to 18,770 at the close in Mumbai, while the 12-member gauge added 1.5 percent to 18,721.35. The futures premium is the most since May 7, data compiled by Bloomberg show. The Reserve Bank of India will cut its benchmark interest rate by 0.25 percentage points to 7.25 percent on June 2, according to 24 of 31 economists surveyed by Bloomberg News.

“There is a possibility of a 50 basis points rate cut too,” Arjun Prajapati, vice president at Asit C. Mehta Investment Interrmediates Ltd. in Mumbai, said by phone on Friday. “We are seeing short covering in banks on expectation the RBI will cut benchmark rates.”

The rally on Friday helped the first-month futures contract close above the underlying index for the first time in more than two weeks. While concern over the pace of earnings growth and a rise in bad loans weighed on lenders in recent weeks, slowing factory output and sluggish company earnings have mounted pressure on central bank Governor Raghuram Rajan to cut rates for a third time this year.

Rajan kept borrowing costs unchanged after a policy review on April 7 as he waits on banks to pass on the two previous cuts to customers. He has said his next move would depend on data showing risks to inflation, which he’s mandated to keep below 6 percent by January.

The Bank Nifty index is little changed this year and trades at 13.2 times its projected 12-month earnings, compared with this year’s peak of 15.9 times. The Nifty Index has risen 1.8 percent in 2015 and is valued at a multiple of 15.5 times.

The India VIX Index, a gauge of protection against stock-market swings using options, fell 2.8 percent to 16.66.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE