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How equity, commodity, currency markets may change post elections

fpi, sensex, nifty

By Ranjan Chakravarty

At the vantage point of the impending elections, all sectors of the economy have experts trying to predict what would be the impact of the election results on it post-May. The exchange sector is no different. Since this is a market infrastructure segment and essentially provides a platform for economic activity, it serves as a reflection of the latter.

All asset classes in an economy growing as robustly as India s would show great increases in volume and the exchange traded space would benefit highly. As expected, 2019 began with unprecedented volumes in all asset classes, with equities and currencies leading the pack. Both the major traded equity index and the flagship USDINR currency pair continued strongly in the global league tables in the Top Ten.

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We see every reason that this trend should continue. In a year of elections, all market players would prepare for uncertainty. Weekly options are ideal for taking positions around policy events instead of longer dated derivatives. Hence, we strongly see weekly options as the place where big spikes in volume will be seen. The Bank Nifty and weekly options on USDINR will certainly be the big ticket plays this year, especially in April- May and all through the rest of 2019.

Post elections, we see volume in USDINR powering ahead this year. There will be both speculative opportunity and hedging needs in this contract. Accordingly we expect that the exchange traded space will shortly come up with shorter and more exotic versions of this contract that will enable traders and hedgers to take short term positions.

In terms of the types of USDINR derivative positions, we expect an equal distribution between calls and puts, with a lot of straddle and strangle positions as well as butterfly spreads to provide insurance from big swings. Accordingly we also anticipate big moves in open interest from mid-year to the end of 2019.

In commodities, we expect that cross asset arbitrages will proliferate and we expect a great deal of volume in select agricultural commodities like Coriander and precious metals such as Silver. This bodes well for the continued growth of the commodity exchanges.

It is too early for an appreciable change in the existing trend in interest rate and fixed income product volumes unless very significant regulatory changes come into effect. This will most likely occur in a slightly longer time frame than this calendar year itself.

Overall, our prediction in the exchange traded space in that volume in equities, FX and commodities will all grow very robustly through the rest of 2019. The key factor that should power the industry to its next milestones beginning this year will be the rise of derivative products. In light of the RBI Governor s recent pronouncement encouraging exotic derivatives, that is a very distinct possibility.

The author is associated with Metropolitan Stock Exchange of India Limited (MSE). The views expressed are the author’s own.