Bank Nifty’s rebound: A signal for market outperformance?

The Bank Nifty, which has lagged behind broader indices the past few months, is showing signs of resurgence. A strong performance by HDFC Bank and Axis Bank, coupled with a mixed showing from Kotak Mahindra Bank, suggests the index could lift the markets in the coming sessions.

Although rising deposit rates have put pressure on net interest margins, HDFC Bank plans to grow its loan book at a slower pace than the industry average to bring down its elevated credit-deposit (CD) ratio. A high CD ratio forces banks to raise interest rates to attract deposits, further squeezing margins.

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"I think the Bank Nifty could begin to outperform now after the past quarter of lagging both the Nifty IT index and the Nifty," said Kruti Shah, quant analyst , Equirus.

The index will likely move within a range of 51,500 to 54,000 this month as large banks implement measures to address their CD ratios, "which the Street likes," she added .

HDFC Bank, which held the highest weight in Bank Nifty at 28.1% and 11.34% in the Nifty as of last month, will play a pivotal role in driving the index higher. “A jump in HDFC Bank and Bank Nifty could support the markets,” said SK Joshi, executive director at Khambatta Securities.

Outperforming the Nifty

Friday saw traders unwind bearish positions in monthly Bank Nifty futures and increase bullish bets on weekly options expiring this Wednesday. Open interest in Bank Nifty futures expiring 30 October dropped 13.82%, as the contract gained 1.69% to close at 52,310—signalling short covering, where bears buy back their sold positions to minimize losses.

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Meanwhile, the put-call ratio for Bank Nifty options expiring 23 October climbed to 1.27, meaning that for every 100 call options sold, 127 put options were sold. This signals optimism as put sellers expect the index to hold or rise, intending to pocket premiums from buyers.

"The Bank Nifty could trend higher from now and outperform Nifty," said Joshi, who uses long -dated options to hedge client folios and to increase returns.

Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services, echoed the sentiment. “The Bank Nifty has found support near 51,000 and could move towards the 52,750-53,000 zone,” Taparia said. He projects the Bank Nifty’s ratio to Nifty—recently at the lower end of the annual range at 2.03—climbing towards 2.25.

The Bank Nifty has shown resilience, bouncing from its 8 October low of 50,466 to close at 52,094.20 on Friday, marking a 3.2% recovery. This follows its record high of 54,467.35 on 26 September.

All eyes are now on ICICI Bank, which holds a 23.81% weight in the Bank Nifty and is set to report its September quarter results this week. Shah believes ICICI Bank’s performance could add further momentum to the index’s upward trend.

On Monday afternoon, ICICI Bank and Axis Bank shares were trading lower by about 0.8%, while HDFC Bank was up by about 3%. Bank Nifty was down about 0.38% while the Nifty 50 was 0.53% lower. 

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With large banks performing well and addressing structural issues like the CD ratio, market participants are optimistic about a sustained rally in the index.

The interplay of these dynamics positions the Bank Nifty to emerge as a key driver for the broader market in the weeks ahead