Bulls return to banks on RBI’s FCNR(B) initiative

Mumbai: Traders have piled into bullish derivative bets on banks, reversing some of the earlier bearish positions, as the Reserve Bank of India’s recent measures to mobilise foreign currency borrowings have brought lenders back to the forefront of the market’s rebound.

Bank stocks were among the top performers last week, with the Bank Nifty gaining 4.25%, outperforming the Nifty’s 1% rise. All constituents of the banking index, barring Yes Bank and PNB, advanced between 1% and 7%.

Analysts said several banking stocks have seen a combination of short covering and fresh long additions in recent sessions, a trend they expect could continue in the coming days. The bulk of the short covering happened in stock futures of the country’s largest lenders, ICICI Bank, HDFC, State Bank of India, Kotak Mahindra and Federal.

On Friday, the Bank Nifty jumped 3% to close at 56,814.8, while the Nifty ended 2% higher at 23,622.9.
The RBI’s FCNR(B) deposit rate mechanism is driving long delta additions in banking stocks, said Akshay Bhagwat, associate director – derivatives research at JM Financial Services. Long delta refers to a trade positioning for a stock or index to rise.

“Because this price rally was accompanied by a 3.53% increase in open interest, it confirms a long buildup, indicating that fresh buyers dominate the series moving into next week,” he said.
The central bank’s FCNR(B) measures are essentially aimed at helping banks raise more foreign currency deposits from NRIs at a lower cost. While flows from abroad are expected to support the weaker rupee, banks will be able to offer higher interest rates for these deposits with RBI absorbing hedging costs and easing regulatory requirements.The RBI’s FCNR(B) initiative could emerge as one of the most significant banking liquidity measures in recent years, said Manish Bhandari, CEO and portfolio manager, Vallum Capital.

“We expect the scheme to attract $35-40 billion of incremental inflows, against an existing FCNR deposit base of roughly $30 billion,” he said. “Banks with strong NRI franchises across the Gulf, North America, the UK, Singapore and Australia, extensive overseas networks, trade-finance capabilities and large foreign-currency loan books are likely to be the biggest beneficiaries.”

The measures have sparked one of the sharpest reversals of bearish derivative bets in banks in recent months, as the sector has taken the biggest hit of the foreign investors’ risk aversion to India because of its biggest weights on the stock indices.

“ICICI Bank, Federal Bank, SBI and Kotak Mahindra Bank saw the strongest unwinding, indicating bears exiting positions, while HDFC Bank stands out as the only major bank name showing sustained long additions and fresh bullish participation,” said Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services. He said the sector’s recent strength appears to be driven more by short covering than aggressive long build-up, with HDFC Bank being the notable exception.

Banks’ derivative positioning suggests these stocks could continue to outperform and attract buying interest in the near term, said Dhupesh Dhameja, derivatives analyst at Samco Securities.

Bhagwat expects HDFC Bank, Federal Bank, Kotak Mahindra Bank and AU Small Finance Bank to gain a further 6-8%.

Traders could be better off by staying away from the current bullish momentum in the stocks.

“The current setup favours a ‘Buy on Dips’ approach rather than chasing momentum at higher levels,” said Dhameja. “Improving put-call ratio (PCR), aggressive put accumulation, strengthening momentum indicators, broad-based participation from both private and PSU banks, and supportive futures positioning indicate that declines are likely to attract buying interest.” He said the bullish structure remains intact as long as the Bank Nifty sustains above 55,500 on a closing basis.