Indian equity markets finally halt a massive “Bull Run”

Last 5 straight trading sessions have confirmed the decelerated Indian equity markets' momentum to settle the Indian benchmark index nifty50 below 8400 levels. Heavy inflows from FIIs to the equity market from have finally begun to hamper. It is reported that a stimulating worth USD 227.3 mln net sale by overseas investors was the largest one-day liquidation on yesterday since early January 2015. But as precautionary measure the RBI has been all well equipped to deal with hot-tempered FX market dynamics triggered by any trend reversal in capital inflows given those official reserves are now USD 340.3bn.

This fact itself is suffice for better clarity of how India was rallying on past commanding outperformance of its equities relative to those of other emerging markets and it is evidenced into currency market as we observed rupee's strength soon after India's general election but now is the time for intermediate trend reversal.

Therefore keeping all these prevailing aspects in consideration we forecast INR against dollar in short term perspective to depreciate quietly. On daily technical chart, a raising relative strength index curve is in not line with pricing curve, this divergence is a bearish signal. And the cross over seen on fast stochastic curve at above 80 levels, this indication is a sure substantiation for bearish mood. A strong support is seen at 62.2607 levels.

Market outlook: Bearish on INR (Short term perspective)Strategy: Necked buy of at the money call options (ATM call options are relatively cheaper over ITM options) Supposing an importer who is expected to pay $ 100,000 in May 2015 needs to hedge his exchange risk, he has to buy 100 lots (i.e. 100000/1000, per 1000 units) of USDINR call option by paying a total amount = (100 * the premium priced per contract). There is no need for the holder of an option to worry about the margin money as he pays the premium upfront and fixes the price at which he has to buy.