Photographer: Dhiraj Singh/Bloomberg

Traders Shun Hedges Before India Vote on Confidence in Modi Win

Updated on
  • Cost of bearish bets lowest since October vs bullish wagers
  • Any losses after results a buying opportunity: India Infoline

Investors are so confident that Prime Minister Narendra Modi’s party will win a key state election that they are feeling little need to hedge against another outcome.

The NSE Nifty 50 Index has rallied to within a whisker of its life-time high amid the lowest price swings in about six months, as data showed Asia’s third-largest economy is recovering from Modi’s shock cash ban. The cost of bearish options tied to the gauge relative to bullish wagers is the lowest since October, signaling muted demand for protection against losses.

“Investors are not hedging the downside risk as they don’t expect anything negative from the elections,” Sanjiv Bhasin, executive vice president at Mumbai-based India Infoline Ltd., said by phone. “There’s optimism that the Bharatiya Janata Party will win Uttar Pradesh state polls. We’re advising clients to avoid going short on the market.”

A strong showing in the key electorate state of 200 million people will help the BJP boost its position in the parliament’s upper house, where some of its reform efforts have stalled, and bolster Modi’s prospects of clinching a second term in the 2019 general elections. Such an outcome would be a boost to an economy that still boasts one of the world’s fastest growth rates, a stable currency and slowing inflation.

“Uttar Pradesh polls is a rehearsal for 2019, and success in this state will give Modi a huge fillip in public perception,” Ajay Bagga, executive chairman at OPC Asset Solutions Pvt., said by phone. “Modi’s government won a clear majority in 2014” after sweeping the northern state, winning 71 of its 80 lower house seats, he said.

Foreigners Return

The value of Indian stocks reached $1.76 trillion on March 2, a nine-year high, as flows into local funds accelerated after demonetization damped the appeal of gold and real estate, and foreigners turned net buyers in February for the first time in five months. The Nifty fell from a two-year high at the close on Tuesday, still 0.6 percent away from its March 2015 record. The India VIX slumped 18 percent last month, the most since September 2015.

One-month put options with a strike price 10 percent below the Nifty cost 4.2 points less than calls priced 10 percent above them as of Monday’s close, data compiled by Bloomberg show.

Some analysts say investors may be underestimating a potential upset for the ruling party at polls in a state that sends more lawmakers to parliament than any other region. The last time the India NSE Volatility Index showed a market this complacent, in September, the Nifty lost about 10 percent over the next four months. The results, due March 11, would be seen as a referendum on Modi’s currency ban that disrupted businesses and prompted foreigners to withdraw record amounts in the December quarter.

“We may see selling even if there’s slight disappointment from the election results,” said Nilesh Dedhia, a director at Vidhi Wealth Management Ltd. in Mumbai. “Volatility is near a record low and signals the market is complacent. We’re asking investors to book profits.”

Opinion polls conducted in January produced conflicting results. An ABP News-CSDS poll released late that month suggested the Samajwadi Party-Congress alliance could win between 187 and 197 seats of Uttar Pradesh’s 403-seat assembly, with the BJP scoring between 118 and 128 seats. An India Today-Axis poll, conducted around the same time, suggested the BJP would win between 180 and 191 seats compared to the Samajwadi-Congress’s 168 to 178.

Bulls say strong inflows and a recovering economy means potential declines in shares after the election results will be bought into swiftly. Global funds bought $1.6 billion of shares last month, the most since July, while local money managers have been buyers for seven months through February, including a record $2.1 billion purchased in November, the data show.

“Foreigners missed the recent rally and are feeling left out, so any fall will be used as an opportunity to buy,” Bhasin said.