Bank Nifty Futures Outrun Stock Gauge Amid Rate-Cut Speculation

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Futures on a gauge of Indian bank shares jumped more than the underlying index, signaling expectation that lenders will advance further amid speculation the central bank will cut interest rates.

CNX Bank Nifty Index futures for May delivery surged 2.9 percent to 18,128.95 at the close in Mumbai, erasing a discount to the underlying Bank Nifty index, which gained 2.7 percent to 18,097.45. Bank Nifty futures closed on Tuesday at their lowest level versus the spot index since January.

The 50-stock CNX Nifty index jumped 1.3 percent to 8,235.45 after government data released Tuesday showed consumer prices in India rose 4.87 percent in April from a year earlier, compared with 5.17 percent in March. The slowdown in the inflation rate raises the possibility that central bank Governor Raghuram Rajan will cut borrowing costs for a third time this year to boost economic growth.

“We advise buying banks on dips as a rate cut is expected after CPI inflation declined,” Arjun Prajapati, deputy vice president at Asit C Mehta Investment Interrmediates Ltd., said by phone. The brokerage doesn’t advise “going short on the index at this level as it looks oversold.”

Rajan kept rates 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 has dropped 3.4 percent, more than the 0.6 percent decline for the Nifty index, amid concern that company earnings growth will slow. The Bank Nifty trades at 13.4 times its projected 12-month earnings, compared with this year’s peak of 15.9 times. The Nifty index is valued at a multiple of 15.2.

The India VIX Index, a gauge of protection against stock market swings using options, rose 0.7 percent to 20.69, its highest close since Feb. 24.