State Bank Option Costs Near 10-Month Low Before RBI Decision

The cost of protection against swings in State Bank of India shares neared a 10-month low amid expectations the central bank won’t deal a surprise at its policy meeting Tuesday.

At-the-money option costs in the nation’s largest lender were at 27.74, according to data available at 4:06 p.m. in Mumbai. That’s close to a level last seen in January, before the Reserve Bank of India cut lending rates by 25 basis points in an unscheduled move. Central bank Governor Raghuram Rajan has since lowered borrowing costs by a further 100 basis points. All 47 economists in a Bloomberg survey predict it’ll leave the repurchase rate at 6.75 percent.

“SBI options are trading cheap as RBI policy may not lead to big fireworks,” Sanjiv Bhasin, executive vice president at India Infoline Ltd., said in a phone interview. The lender’s shares could outperform the market amid expectations for “liquidity enhancement” by the RBI, and the absence of negative news, he said.

Commercial lenders including State Bank have cut their own rates by only as much as 70 basis points, amid concern that an increase in bad loans would affect profitability. Rajan’s job has been complicated by a proposed increase in salaries of millions of civil servants that could boost consumption and derail plans to curb the fiscal deficit.

The cost of a State Bank call option with a strike price of 250 rupees, the most popular contract by open interest, fell 2.4 percent. The cost of a 240 put slumped 12 percent. The lender’s shares climbed 0.2 percent to 250.20 rupees on Monday, capping a monthly advance of 5.6 percent, the most in a year.

Implied volatility in Nifty Bank Index was at 20.1, near its lowest level since August. The 12-member gauge gained 0.3 percent to 17,430.40. The India VIX, a benchmark measure of demand for option hedges, slid 1.8 percent to 16.43.

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