Badla rates headed north

NetScribes/Janaki Krishnan

Badla rates are expected to head northwards in the near future due to a rise in outstanding long positions in the market and a paucity of funds for badla financing.

Last Saturday, the carry-forward rates went up to 14-15 per cent against 10-11 per cent in the previous week. One reason for the steep increase was the rise in the long positions to Rs 22 billion from Rs 19 billion in the previous week. Lack of funds for carry-forward trades was the other reason for the rise.

"There is obviously more demand than supply," said Vivek Ganguly, analyst with Choksey Securities. Tracing the run-up to the current rise in badla rates, he said that earlier this month, when the rates were at around 5 to 6 per cent, "there was a lot of liquidity in the market." However, since then, the Reserve Bank of India measures (to curb liquidity) have started to pinch and funds have dried up.

According to market sources, badla financiers are deploying their funds elsewhere. They are using their resources to conduct their own trades, while some money is now finding its way into the Automated Lending and Borrowing Mechanism (ALBM) of the National Stock Exchange. Some funds are also being channelised into the regional exchanges, which have begun to see some activity.

The rise in the outstandings with a commensurate rise in badla rates will have its impact in the normal market segment too. After a certain point of time, brokers will find it difficult to sustain the high rates and will unwind their long positions. This will lead to a dip in the market, bringing in a technical correction.

On the other hand, if the outstandings increase and the carry-forward rates remain level, then it could lead to overheating in the market. This scenario will be true only when there are lots of funds available in the market. However, brokers have to pay margins on the outstandings and when the payment of these margins becomes unviable after a point of time, they will start unwinding. In this case, the crash will be more severe. The net impact in either case will be a cooling off of the market, differing only in severity.

The lack of any positive drivers in the economy or in specific scrips will also be a trigger for brokers to unwind their positions.

Some brokers are anyway expecting the market to go southwards over the next one month. The main reasons for the slide being the badla rates, the outstanding positions and macroeconomic factors such as how the government plans to tackle the mounting oil import bill.

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