Fundamental Factors of Bank Nifty Movement for Judgement

If a trader was allowed only one piece of data to trade with, he would no doubt choose the Nifty 50 chart as his compendium for trade decisions. No Index is more representative of the Indian stock market than the Nifty and, this magical Index gives the following phenomenal weightage to the Banking and Financial Sector:

Index	Nifty 50	Nifty 100	Nifty 200	Nifty Largemidcap 250
Weightage %	25.52	22.11	20.82	20.89

 

Some studies show that Nifty and Bank Nifty reflect a very high correlation of 0.99. So, no two guesses as to why, the latter is a proxy for the former!

How to study Bank Nifty Chart then? By digging deep into the Fundamental Factors driving Bank Nifty’s constituent banks’ stock value and unravelling how they drive the price of Nifty 50 chart, of course!

Fundamental Analysis needs a close look through a dual approach:

• A Top-Down approach analyzing prevailing Macro Economic factors, Industry and Sectoral factors and individual Company analysis, to arrive at impact on price of Index or Stock.
• A two-pronged Company analysis through Quantitative factors (ie. Financial Statements, Profitability, Key Performance Ratios etc.) and Qualitative analysis (ie. Corporate Governance, Business model sustainability, Brand identify etc.) to understand current and future valuation.

Spot Index levels from Nifty 50 chart, are used to construct futures price in the F&O segment. An inveterate trader would know that in an efficient market, derivatives not only serve as Risk Management tools but also help dampen volatilities and ramp up informational transparency of the spot/cash markets, making spot and futures move in sync. 

While this is foolproof on paper, market reality is to the contrary. Fundamental analysis shows the existence of major Leads and Lags between Index spot and its derivatives. While at normal times, spot markets appear to play a faster role in pricing in fundamentals (Leading indicator as compared to futures), in times of company-specific news release, derivative segments may show weakness in showcasing price discovery efficiencies. 

With the advent of the Nifty Financial Services Index, studying the Bank Nifty chart has been augmented by the effect that other financial services besides banking, have contributed to the push and pull in Nifty 50 charts. 

However, the magnetic effect of the Bank Nifty chart on the Nifty 50 index moves, would be hard-pressed to shrug off due to a variety of strong, logical arguments such as:

• Capital stability of consolidating public banks and the performance of top 5 private banks which spearhead electronic sophistication and digital service
• Diversified nature of liability base
• More mature retail asset performance in recent times
• Higher levels of bad asset recoveries due to quicker stress recognition and aggressive TAT in law enforcement measures etc.

With a plethora of macro-economic fundamentals to consider, the retail trader’s question of how to study the Bank Nifty chart, can best be answered, by drawing his attention by need to watch along with his daily technical chart, also the data driven mega-movers such as, National Growth rate, Trade figures, Fiscal deficits, Forex reserves, Interest rate movements and an eye all the time on the Institutional investors, both domestic and FIIs.

There can never be a compromise of the fundamentals. in any market!

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