The markets may have bounced back in the last three days, signalling that the worst may be over for the time being. With foreign institutional investors (FIIs) too in a buying mood in the last two days, sentiment got a further boost. Besides, India VIX, the volatility gauge that painted a negative signal, also turned soft to quote at around 30.

Despite all these positive signals, one thing that’s worring traders is the huge discount of Nifty futures and Nifty Bank futures with respect to their underlying indices.

The Nifty index futures at 9,482.25 is currently ruling at a whopping discount of 98.05 points to Nifty, which closed the day at 9,580.30. The discount widened from about 55 points to 98 now. Similarly, Bank Nifty futures, which was quoting at a discount of about 125, has widened to 259.30. Bank Nifty futures on Friday closed at 19,037.95, against the spot price of 19,297.25.

According to market analysts, discount happens mainly on account of two events one, when big institutions go short on index futures, and two, when many shares likely to turn ex-dividend.

Since the Reserve Bank of India had asked scheduled commercial banks and co-operative banks not to pay any dividends for financial year ending March 2020, the discount on Bank Nifty futures is not due to stocks turning ex-dividend. According to exchange disclosure, no company is turning ex-dividend in the near future. So, analysts say the discount is not on account of dividend.

Most market experts say the trend (discount) has been around for quite some time. In fact, in March at one point in time, Nifty futures was at a discount of 200 points, but that narrowed to about 80 points after the Nifty plunged to a low of 7,511.

Hedging strategy

According to an independent analyst based at Chennai, “The sharp discount signals the existence of large number of short positions in index and stock futures, as foreign investors still remain pessimistic on India. Also, no one is sure of the impact of Covid-19 on the economy and corporates. So, FIIs have prepared to hedge their long positions in the cash segment by adding short positions in the derivative segment,” he added.

Another market watcher said the main reason is the lack of volumes, especially post SEBI’s new order on margin requirements, which was supposed to kick in from June 1. Most marketmen prefer to wait and see how it will impact the liquidity in the system.

SEBI, in February, came out with a framework under which trading or clearing members need to accept collateral from clients in the form of securities only by way of ‘margin pledge’ created in the depository system with effect from June 1. However, this has been postponed till August 31 due to Covid-19 disruptions.

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