HindustanTimes.com

Friday, October 10, 2003

Spreads draw foreigners to Indian stock futures

Reuters
Mumbai, October 6

Offshore funds are taking fancy to India's booming stock derivatives market,
tempted by high spreads between the cash and futures prices of shares.

Since January, they have doubled their share of the total outstanding
derivatives position of nearly Rs 160 billion ($3.5 billion) to 10 per cent.

This has been driven by the high differences between cash and futures
prices, a condition which is typical of a bull market, and which gave
annualised returns as high as 24 per cent in September. Traders say this was
the highest annualised return since derivatives were launched in 2000.

"Arbitrage always existed but its appeal has gone up due to a sharp rise in
differentials over the past few months," said head of equities and
derivatives at Refco-Sify Securities India, Sandeep Tandon.

On the National Stock Exchange, which accounts for about 90 per cent of the
derivatives trades, volumes in September rose to 185,000 contracts worth Rs
84.16 billion from just 27,140 contracts for Rs 13.57 billion a year
earlier.

Brokers say most of the trades are done by hedge funds and unregistered
institutional investors. Some of the established names said to be active in
the market are SG Asset Management, Morgan Stanley Asset Management and
Citigroup.

Tata Iron and Steel Company Ltd, Tata Motors Ltd, Mahindra & Mahindra Ltd,
State Bank of India and Infosys Technologies Ltd are the top five actively
traded stock futures contracts.

Analysts estimate as much as 30 per cent of foreign fund inflows of $2.4
billion over the past four months were drawn by the high spreads between the
cash and futures markets.

Foreign funds have invested $3.1 billion in Indian stocks so far in 2003 --
the highest annual inflow since India opened its doors to foreign funds a
decade ago.

In contrast, they bought only $740 million of stocks in 2002.

"Globally, there are dedicated arbitrage funds sniffing for such
opportunities and they will continue to invest so long as spreads remain
attractive," Tandon said.

In a bull market, futures trade at a premium and fund managers buy in the
cash segment and sell equivalent stock futures of the same company.

Though cash and carry arbitrage, as it is popularly called, is a simple
method of tapping spreads, it requires deep pockets. And that acts as a
deterrent to retail investors.

Futures usually trade at a huge premium when investors are bullish. India's
best monsoon rains in five years has fuelled hopes of an agriculture-led
rebound in Asia's third-largest economy.

Gross domestic product for the fiscal year ending March 2004 is seen more
than six per cent higher than the previous year's, which showed only 4.3 per
cent growth.

OUTLOOK CAUTIOUS

Analysts are not sure of the future trend, with some saying that spreads
could narrow if the current earnings season falls short of expectations.

Premiums are expected to drop in the short term as traders turn cautious
after a five-month rally in the cash market that pushed up the key Bombay
share index about 56 per cent from late April.

Market focus is currently on June-September earnings which start rolling out
this week.

"Caution is the watch word. Even if there is slightest disappointment it
could lead to a sharp hair cut," said London-based chief investment officer
for South Asia and Africa at BNP Paribas Asset Management, Avinash Vazirani.

The spread in October futures of Reliance Industries Ltd has narrowed to
about six per cent from 12-15 per cent in the past month but is still up
from around zero a year ago.

"If premiums dwindle, then investors may decide to close out futures
positions which could lead to selling in the cash market," said head of
derivatives desk at ICICI Securities and Finance Company Ltd, Anil Desai.

Normally as the monthly settlement nears, investors roll over their short
positions in the futures segment to the next month. But if the rollover
price is unattractive, they reverse the trade by selling their cash holdings
and unwinding the futures position.

© Hindustan Times Ltd. 2003.
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