What Is Bank Nifty? Bank Nifty is the Index that comprises of the most liquid banks listed on the National Stock Exchange (NSE). Bank Nifty comprises the twelve leading banks (inclusive of both the Public sector and Private sector) that are publically listed on NSE. Following is the list of 12 banks included:
- Axis Bank Ltd
- Bank of India
- HDFC Bank Limited
- ICICI Bank Limited
- Bank of Baroda
- Canara Bank
- Kotak bank limited
- IDBI Bank Limited
- Oriental Bank of Commerce
- State Bank of India
- Punjab National Bank
- Union Bank of India
The Bank Nifty index is the highest traded Index in Futures and Options Market. In fact, Bank Nifty and Nifty Index have a very high positive correlation because of a very high weightage of Bank Nifty in Nifty 50 Index.
A Brief History on Bank Nifty
The Bank nifty was introduced in September 2003 but its base year is considered to be January 01, 2000. The base value in the year 2000 was taken to be 1000. So, if Bank Nifty right now is trading at 20,000, that means it’s given returns of 20 times over the last 20 years.
The Bank Nifty values are available on the real-time market and its volume of trading is more than that of Nifty index. It’s the first Index with weekly expiring options with the highest volume of trading and hence very liquid.
Nifty Bank Top constituents by weightage
Here is the weightage of the top ten banks constituting Bank Nifty As on March 31, 2020:
Source: (NSE India)
Looking at the above representation above we notice that the top 5 banks constitute almost 85% of the Bank Nifty. So naturally, any movement in one of these 5 banks have a lot of bearing on Bank nifty and even the Nifty 50 Index.
Private sector banks have a major portion in Bank Nifty and very few public sectors make the cut. This could also be because Private sector banks (unlike the public sector banks) are more modernized and technologically better equipped to tackle the needs of modern banking system. And hence the trading activity in Private sector banks are also higher.
Even if we were to see the breakup of the Nifty 50 index, we can see that Bank Nifty occupies about 28.5% share (highest for a sector), followed by Technology (18%) and Oil & Gas (14.5%). Therefore, if we see a substantial move in Index, we can safely assume that banking sector must have played a part in it and index move must have also impacted the Bank Nifty Index.
How Weightage is decided in Bank Nifty?
To simply put, the weightage of banks in Bank Nifty is purely dependent on the free-float market capitalization of banks. The Free float market capitalization does not mean the full capitalization method. It basically means the market value of the total number of shares (excluding promoter holding, government and insiders) actively trading at exchange.
The free float method is the best way to judge a banks weightage in the Bank Nifty Index. The current share price decides the weightage and the banks day to day performance has a lot of bearing on their share price and which in turns also impacts the Bank Nifty movement. The corporate policies, the innovation, the products, bank-specific news, corporate policies etc., impact the share price which in turn impacts their weightage.
Therefore, from the above discussion, we can easily conclude that HDFC bank is not guaranteed top position in the Bank Nifty index. It can be taken over by any bank if that bank share price starts to outperform that of HDFC banks share price over a period of time.
Trading Bank Nifty Futures
A futures contract is a forward with fixed expiry date and the contracts expired can be rolled over to next contract. The Bank Nifty futures contracts are derivative instruments deriving value from the Bank Nifty Index.
The Bank Nifty futures contract have three contracts running simultaneously. The 1st month (near one), the next month (the two month contract) and the far month (three month).
When the near month contract expires, a new far month contract is introduced. So at any point of time, there are three active contracts in Bank Nifty futures. Bank nifty futures contract expire on last working Thursday (or previous day if the last working Thursday is a holiday) every month
Trading Bank Nifty Options
As discussed in my previous article, options are contractual rights (not obligation) of the option buyer and obligatory duty of option seller. The Bank nifty option contracts are cash settled. Bank Nifty options contract derive their value front he Bank Nifty Index (Underlying asset).
Just like the futures contract, even the bank nifty options contract have three monthly contracts (Near one, two month one and a far one). And once with the expiry of the near month contract, a new far month contract is added. Bank Nifty has 7 weekly expiring contracts. At the expiry of near week, a new serial weekly contract is introduced.
The weekly expiry contract expire every Thursday of the week and if that Thursday is a holiday, then the contract expires the previous day. Similarly, the monthly Bank Nifty options contract expire on the last Thursday every month and again if the last Thursday is a holiday then the contract expires on the previous day.
To Summarize this article, we can conclude by saying that the overall health of the economy can be gauged by looking at the health of its banking system. Bank Nifty goes a long way in explaining it. Bank Nifty constitutes 12 of the major public and private banks in the Indian Banking system. Bank Nifty options contract form a majority in the Indian Options market and they have a series of weekly and monthly expiring contracts.
Experienced professional with a demonstrated history of working BFSI. Have traded in both ICE and NYMEX exchange trading international energy markets. Skilled in Derivatives trading, Strategic Planning, portfolio management, Commodity Risk management, Market Risk, Algo trading. Strong finance professional with an MBA focused in Business management.