Equity benchmarks rose to their highest levels since January 2011 this month, while the 10-year bond yield dropped to its lowest in more than three years, powered by record inflows from FIIs on rising expectations that easing inflation may prompt the RBI to cut the interest rate again in June.
Tushar Mahajan, head of futures & options at Nomura (India) does not see Nifty crossing 6300 in the May series. However, he says the pullback over the last two trading session is "healthy" for the market.
Equity benchmarks rose to their highest levels since January 2011 this month, while the 10-year bond yield dropped to its lowest in more than three years, powered by record inflows from foreign institutional investors (FIIs) on rising expectations that easing inflation may prompt the Reserve Bank of India (RBI) to cut the interest rate again in June.
For now, Mahajan says, Nifty is unlikely to slip below the 6000-mark as it does not have the "cushion of shorts". "The market is net long on both futures and options. The positions on the short side continue to be limited," he told CNBC-TV18 in an interview.
He says 13300 on the Bank Nifty is critical level for the index, which is currently witnessing consolidation.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Do you think the Nifty will be able to clear this 6,200-6,220 zone by the end of the May series or do you see resistance kicking in there?
A: It is rejected that level almost twice in the last three-four days. That is quite critical to watch for now. I think the critical level for the Nifty right now, is to be able to cross through that level and then inch up higher to 6,300 level. I think the way we are seeing positioning build up towards for the end of next week which coincides with the May expiry, I would tend to think that we might crossover 6,200 level but definitely not 6,300 level.
Q: Last couple of days, May traders are a bit skittish, do you think this is just a pullback or is there a possibility of a Nifty dropping below 6,000 again in the next couple of weeks?
A: With the kind of rally that we have seen over the last month to a month and a half, these kind of pullbacks are a reasonably healthy trend for the market because you cannot survive with just way move on the markets. So at this point in time, given the way the last two trading sessions especially the last one hour of trade has played out, I would tend to think these are just healthy corrections in the market and we would continue to look at a trend from an upside. I do not think in the short-term, we should see the markets going under 6,000 mark of course all of this is very contingent on how the Federal Open Market Committee (FOMC) pans out today and what we come out hearing from Ben Bernanke.
Q: There is a big event later this evening, at this point, what kind of short cushion does the market have?
A: Despite the correction in the last two days not too much. I think everyone has been fairly positioned on the long side and that is a big risk to the market that hedges are not as strong in the market as you would typically expect after a move like this. If you look at the futures, obviously we know that foreign institutional investors (FIIs) have been buying in the cash space for all of this while but interestingly even on the future side, you have seen over the last two days, the index futures buy number has been positive. So very clearly, the market is not as cushioned for a move right now but I think the trend seems to continue to suggest that it should continue to move up.
Q: There has also been an uptick on the India volatility index (VIX), we are trading at well above the 17 mark, what does that usually suggest to you that there is just a lot of amplitude within a trading range for the market or that it is a prima that the market could be primed for more downside?
A: Not really. I think the VIX correlation with the market has broken down significantly for more than a year now. Earlier we would see that the VIX would typically rise much ahead of a market pullback. That trend seems to have changed and it has become positively correlated with the index. So as of now, given the fact that the VIX is trading well above its recent averages and well above that 17.5 odd levels, it is primarily because of the fact that this move caught people by surprise and everyone was scampering to cover the short calls. This rise above does not – to my mind – indicate the fact that the market is primed for a fall. But yes, the positions on the short side are definitely limited.
Q: Specifically on the Bank Nifty, what kind of positioning have you seen now because last couple of days that softened up a little bit?
A: What we have been maintaining and what we have been telling clients is that for the next trend in the market Bank Nifty has to sustain above its 2010 highs, which is around 13,300 levels. It did make an attempt, it did try and stay above that level but gave away completely beyond that. So I think that is a level which we are very critically watching on the Bank Nifty. If that level breaks decisively and the index tends to stay well above that level, for an extended period of 2-3 days, that is where we would look at initiating more long positions there. But right now, Bank Nifty definitely looks like to be either on the consolidation phase or that it could give away some of its recent gains.
Q: What is FII activity like over the last few days? Do you see a lot of long positions being built and do you expect that to be rolled over to the June series?
A: In terms of what we are seeing right now is that the FII activity has been focused more on the cash base. On the future side, people have built in their positions but over the last one-two days, specifically single stock futures, we have been seeing people trimming off their longs a bit. But this could probably be more in response to the overall deployment in the cash market and stuff like that. But on the future side, we have been seeing people trimming off their positions a bit for sure.
Q: Which specific stocks with respect to the heavyweights, because there is some talk about how ITC has been such a big underperformer but oil and gas has started moving, so where have you seen this trimming of single stock positions?
A: I think specifically names like ITC was one, National Thermal Power Corporation (NTPC) was another one which was a big drag in yesterday’s performance. Some of these are so called defensive sectors and they had a reasonable run up over the last two-three weeks as well. Those are names where people are taking off their positions. On the contrary, you have names like Bharat Heavy Electricals Ltd (BHEL) and all where people are beginning to cover their shorts and those are short positions which have been in place over three months now. So it seems to be a trend where people are trimming off their long positions in names which have had a good run and then also covering them off with names which have been big drags.