Heads Up Bank Nifty Traders

Hello friends. This is Vijay Bhambwani and I'm back with you in this video to address my friends who are specifically trading in the bank nifty and banking stocks in particular.

Now there is an old saying among us Hindus and this is not to impose my religious beliefs on you. This is just that every religion, every civilisation, every society, will basically advocate the same feelings, probably in different words. So this is a universal phenomenon.

Now what I'm about to tell you is the Sanskrit saying, 'Moorkh Poojyate Parivara. Swadeshe Poojyate Raja. Vidvaan Sarvatra Poojyate.'

What it means is even a fool is worshipped in his house. A king is worshipped out of compulsion in his kingdom, but a scholar is worshipped in all four directions voluntarily in the universe.

Dear Reader: If You Invest in Midcap Stocks, this is for You

In the financial markets, a knowledgeable investor or a knowledgeable trader is rewarded by the markets. No invisible hand comes out of your computer trading screen on your mobile trading screen, to throw a garland around your neck. The way the market rewards you is by giving you profits.

So what I'm about to tell you is a piece of information that should help you, over time, to understand banking stocks and the bank nifty in particular, somewhat better than what you're comprehending right now.

You see, I talk a lot about the bond markets, bond yields, inflation, and fixed income returns very extensively in my videos. The reason is that this is the kind of money, which is a minimum, a minimum, of six times more than equity investments of a rank and file average Indian saver. So this is not loose change at all.

On Friday, the RBI simply changed the rules of the game and that came as somewhat of an unexpected development to many people, myself included.

You see the RBI issues what is known as the 10 year benchmark bonds. Just as the Nifty or the bank nifty, are benchmark indices of their particular segments, bank nifty of course, caters only to the banking stocks, and the Nifty 50 is a broad based index.

So the 10 year benchmark bond yield is a benchmark or an indication of the prevalent rate of interest in India. The RBI was earlier offering 5.85% interest on the 10 year benchmark bonds. They issued a new series of bond on Friday, which gave a whopping 6.10% interest.

Now this was a quantum jump. Do remember that currency many commodities overseas, and definitely bond markets, are traded in three and four decimal points. So when quarter percent or, in market parlance, 25 basis points, one basis point is one hundredth of a percent.

So when the RBI simply raised the yield on benchmark bonds by 25 basis points, it created quite a flutter. As a matter of fact, if you are a subscriber to Equitymaster's telegram channel which goes by the handle Equitymaster Official, I put up an update as soon as I woke up from my sleep on Saturday morning. The reason why you should be careful as a bank nifty trader or banking stocks trader is this.

Now this is where knowledge gets rewarded. You see, if you were to invest in a bank fixed deposit in any PSU or a private sector bank, you would realise that you're getting anything between five and a quarter percent to maybe five and half percent ballpark. I could be off by a few basis points here and there, depending on the bank.

But banks are not sovereign guaranteed. Sovereign guarantee means guarantee backed by the central or the state government, preferably central. Now we've all seen how PMC bank, a whole lot of other, smaller, cooperative banks have gone belly up. Belly up meaning defaulted.

You've also seen how Yes bank came under a cloud till it was revived by the SBI and other banks and the government of India and therefore the fixed depositor's money was a kind of safeguarded.

So we all know that bank fixed deposits are not sovereign guaranteed, even though there is a deposit guarantee act protection of Rs 5 lakh per individual but your entire amount can never be safe.

On the flip side, the government of India ten year benchmark bond is sovereign guaranteed and it's earning 6.10%.

So now an average investor is wanna go to his banker and say, look, the RBI, the central government, and there can't be anybody safer than that, is giving me 6.10%. Unless you increase the rate of interest, I'm gonna pull my money out or I am not gonna put in any fresh deposits.

So this has the potential to raise the bank's cost of raising money, which means raise up the interest rates on fixed deposits, which means drive down the bank's profitability.

The banks in turn, will start increasing the interest rate that they charge to people, whether it is a credit card payment, or an outstanding that you have, whether it is an EMI that you are paying, whether it is the white goods personal loan that you're taking from your friendly electronic shop for buying that LCD TV, LED TV or refrigerator or air conditioner or whatever. Your interest rates might just go up.

Secondly, now that the bond yield bond the interest rates known as coupon rates have been raised from 5.85 to 6.10, the existing bonds are witnessing a selloff. When bond prices go down, the yields go up because the interest rate that the bonds are attracting remains constant but the price has gone down.

As I record this video on a Monday evening, the bond prices have closed lower and the benchmark yield is 6.22%. That's a huge jump from Friday when it was 6.15%. Now, when bond prices go down, the biggest holders of these bonds are banks.

As you would be aware, as a bank nifty trader, when you go long on the bank nifty and the price comes down, you have to mark yourself down to market and there is a mark to market loss. So there will be a portfolio mark down on the bank's books on these bonds, and the market already knows that.

The savvy trader who's watching this video, I consider subscribers of my YouTube channel to be savvy enough to understand the 360 degree world view of the financial markets, and they basically take informed decisions. So you will know by now what I'm talking about.

Number one. The financing charges or the cost of raising money by banks will go up because they will have to compete with the RBI to offer higher rates. Number two. They will have to take a mark down or a loss on bond prices on their books of accounts.

Now, Monday morning I saw an article on the internet that the SBI and look at how fast SBI has reacted, the SBI has started offering a new kind of a savings account to its clients wherein they are willing to offer a rate of interest higher than the prevalent savings accounts.

Of course, it's a no frills account. You will be allowed only 25 cheque leaves in a year. If you want more, you'll of course, have to pay for it. So SBI has smelled the winds of change. It's now realised that raising money will come at higher cost and therefore, it's offering zero frills, higher interest bearing savings accounts so that it can raise money faster than the other bank can react.

Once the other banks get into the act, they will start mopping up money from investors before rates actually go up and over a period of time when interest rates go up, I feel there could be some pressure on banking stocks and by default on the bank nifty. Let us not forget that in the Nifty itself, the financial sector services almost contribute between 36 to 40%. It changes month on month and have told you how in my previous videos.

So almost a third, if not higher of all the weightages the Nifty are held by banking and financial sector stocks. If they are to come under some kind of consolidation or some kind of corrective pressure, it could crunch the amount of profits that you would make over a period of time.

The markets are now being dominated by retail traders, as I have explained to you in my previous videos, and they're not savvy enough, they are not experienced enough because they have only entered the market in the last 15 to 16 months maybe. So it takes time for them to grasp all these things but you, as a savvy trader or investor, should be forewarned that this development has occurred and the rules of the game have changed.

What would you do or what should you do is a question that you would ask me.

I would answer it in a slightly different manner. I would tell you what I will do. As a door of deeds, I would do something, and I am gonna share with you what I would do. I would continue to trade the way I'm trading. I would cut down my exposure levels because I think the market is likely to get a little more volatile. Like I've warned you in my previous videos, it's time to trade cautiously, volumes have fallen. Even today on Monday, volumes in both index and start futures have fallen. So number one I would cut down my exposure levels.

Number two. I would be keeping hawk eyes on my stop losses on my long positions in banking stocks. If it all the stop loss is hit, I will not hesitate for one extra second and start hoping and praying that if I wait for the next 3, 4, 5 minutes, the prices will jump. I would enforce my stop losses, cut and run.

If I like the stock again I enter it, if the signal warranties it, but I will not take extra risk. As long as you adhere to this discipline, I believe you should be doing just fine. Now that you're empowered with this knowledge, go out there and play with ease. Just keep your stop losses diligently.

On this cheerful note, I'll bid goodbye to you in this video not before reminding you to click like on this video if you liked what you saw. Subscribe to my YouTube channel if you haven't already done so. In the comments section, good, bad or ugly, I welcome all your feedback and help me reach out to fellow like-minded investors and traders by referring my video to your family and friends.

I wish you have a very, very profitable day my friends. Thank you for your patience and watching my video. Till we meet again in my next, this is Vijay Bhambwani signing off for now. Take very good care of your trades and investments, your family, friends, and your health. Bye.