Can we Compare Bank Nifty with Interest Rate Spread to Find the Cyclical Movement?

  • Stock Market Analysis

Generally, the sectors like banks, automobile, housing finance, real estate, metals, etc. react to rate changes whenever RBI reviews the rates every two months. Recent RBI monetary policy unchanged the repo rate and kept it at 4%. The rising Repo Rate slows down the economic growth and is unfavourable to the markets. Usually, a low-interest rate causes high inflation, and a high interest rate brings down inflation. Countries like Brazil, Russia, Turkey are facing high inflation, raised interest rates recently.
 
As inflation is globally interconnected and in India, Petrol Diesel prices crossing Rs 100 and Palm oil prices more than doubled, surely inflation will shoot up in coming months so RBI has to increase interest rate which is inevitable.
 
To get a better understanding of Interest rate cycles, we have taken the Spread of the 10-year bond Yield Rate and 3 Month Treasury Rate and compared them with Bank Nifty Returns. To find out how the bank index is reacting to Interest rate spread, which may not be a perfect indicator as it shows some misleading whipsaws. We can have a long term prediction approximately.
10YR BOND YIELD-3MONTH YIELD SPREAD VS BANKNIFTY

In this Chart, the Interest rate spread is compared with Bank Nifty in which it is difficult to find the cyclical movements of the Bank Nifty. So we normalized the BANKNIFTY values in the chart shown below.
10YR BOND YIELD-3MONTH YIELD SPREAD VS BANKNIFTY  BOTH NORMALIZED

The chart is showing Interest rate spread and Bank Nifty Prices are Normalized to find the cyclical movements. Peaks and Troughs are not exactly matched due to averaging but clearly showing if Interest rate spread is increasing Bank Nifty returns decreasing and vice versa.
 
Presently interest rates are due for an increase, Banking sector is in Negative Bias and showing that Banking Sector follows Interest rate cycles based on back-testing. Expect Bank Nifty moves in coming weeks with negatively skewed. We can compare other sectors also with Interest rate spread to find which are positively biased or negatively biased.

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100
  • Prabhakararao Botu @Prabhakararao Botu
    Good Analysis
    Like 0
  • Subhasish Chaki @Subhasish Chaki
    like your perspective and analysing tool... keep it up👍
    Like 0
  • mayor dhanak @mayor dhanak
    good read
    Like 0
  • Kiran Jagtap @Kiran Jagtap
    Good Article Emmanuel
    Like 1

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