Understanding the Impact of Banking Pulse on the Indian Stock Market: An In-Depth Analysis

As the passive investing universe sees more permissions being granted for and the launch of new products, indices at market exchanges are set to get more spotlight. From the flagship indices at India’s premier stock exchanges like the Nifty (NSE) and Sensex (BSE) to the sector-specific sub-indices that act as bellwethers of their industries, they are key to passive investments. One such index at India’s largest stock exchange by volume, NSE, is the Bank Nifty.

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What is the Bank Nifty?

The Nifty bank index which is also known as the ‘Bank Nifty’ index, is the index that tracks the banking sector comprising 12 banking stocks. The Bank Nifty index was created by the NSE in September 2003, to gauge the capital market performance of one of the critical service sectors in India, Banking.

An index represents the performance of a segment of the financial market by tracking a group of diversified but representative constituent securities from the market, in a certain weightage ratio. The Bank Nifty share price is basically the value of the index at a particular point in time.

The Nifty bank index, being a benchmark for the banking industry, is supposed to be representative of the banking sector. So, no single bank stock has a weight of more than 35% on the index, while the weight of the top three stocks together totals 71% of the overall index. 

The NSE bank stocks chosen for the Nifty bank index were selected based on their free-float market capitalization and include private and public sector banks.

The largest banks on the Nifty bank index are HDFC Bank, with around Rs 9.28 lakh crore market cap and 32.8 per cent weightage, ICICI Bank with Rs 6.15 lakh crore market cap and 27.11 per cent weightage, and Kotak Mahindra Bank with Rs 3.67 lakh crore market cap and a weightage of 11.46 per cent on the index. All the figures above are as of April 13, 2023.

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Bank Nifty weightage

The table below illustrates the breakup of the index bank stocks and their weightage:-

As the largest three banks together constitute more than 50 per cent of the Bank Nifty weightage, the movement in their stock prices considerably affects the index’s value as well.

Here is a graph to show how the stock prices of the largest three affect the Bank Nifty value:-

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Bank Nifty Price

While there is no Bank Nifty share price, as it is not a single stock being traded on the NSE, the value of the Bank Nifty, symbolic of the bank stocks and based on the constitution of the index, is updated in real-time in a trading day, much like other stock prices. 

If we are asked, “How do you find the trend of bank Nifty,” the answer would be to look at the stock market. 

A Bank Nifty live chart will tell us how the index has moved on a trading day. NSE keeps a tab of the movements and we may find the latest price and the trend of the Bank Nifty index from its website and brokers.

Passive investment products such as ETFs (exchange-traded funds) and index funds track benchmarks this way (ie. follow their value or price movements) to generate returns for the investor. Besides passive investment products, derivative instruments also exist that earn off the Bank Nifty index. Derivative instruments derive their value from the underlying security, which is Bank Nifty in this case.

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Derivatives Traded on Bank Nifty Index

Futures and options (F&O) contracts of Bank Nifty can be traded on the exchange. Both futures and options contracts of up to three months are available on the exchange. In the month of January, for example, the derivative contracts for January, February, and March will be available for trading on the exchange along with contracts of Bank Nifty’s weekly expiry. Bank Nifty option chain is a list of all option contracts expiring on a particular date, sorted in the order of their strike price. Bank Nifty option chain can be used to determine the bank nifty future based on volatility and Open Interest (OI).

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What is the Lot Size of Bank Nifty?

Lot sizes refer to F&O contracts clubbed together for trading. The Bank Nifty lot size is 25 contracts grouped together but is going to be reduced to 15 contracts from July 2023. You can further trade in multiples of the lot size like 30,45 or 60 etc after April.

A lot of derivatives contracts standardize the contracts and helps the trader know easily the number of contracts being bought in a trade. Depending on the price and volume of the security being traded, lot sizes may differ.

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What is Bank Nifty Expiry?

The Bank Nifty expiry refers to the end of the validity of the derivative instruments with the Bank Nifty as its underlying asset. 

The expiry date of these derivative contracts (F&O) is the last Thursday of the expiry month; should the last Thursday be a trading holiday, then the working day before the last Thursday will be considered as the expiry day.

The demand for Bank Nifty F&O contracts led NSE to launch weekly contracts in May 2016. Such contracts expire every Thursday following their launch, and a new weekly contract is launched thereafter. 

There are a total of seven weekly expiry contracts, excluding the expiry week of the monthly contracts.

Of course, when it comes to the settlement of Bank Nifty F&O contracts, at the end of each contract, the underlying assets have to be delivered or received by the related parties by way of a cash settlement. For Stock Derivatives, cash settlements against underlying assets in derivative contracts were allowed until October 2019, but SEBI has mandated physical settlement now for all stock derivatives.

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Bank Nifty Option Chain

Bank Nifty options are popular among F&O traders. For traders, a Bank Nifty option chain is the go-to document.

An option chain is a page with key information about the options contract of a stock or index whose options are being traded in the market. It includes details such as open interest (total outstanding contracts), volume, implied volatility, the last traded price, and the bid and ask quantity for both call and put options at all the strike prices at which the options contract is available in the market for a given validity.

Included below is an option chain on Bank Nifty:- 

Option Chain (Equity Derivatives)

Source: NSE, Tavaga Research, As of 13th April 2023

The table will change with the changes in the spot price of the Nifty Bank index. The options which are in the money are in grey, while the rest are the ones out of money

The Bank Nifty option chain lets traders identify the support and resistance levels. By checking the open interest data for both call and put options, the trader may identify the breakout level for the trade.

Banking News and Global News Impact on Bank Nifty

The Bank Nifty is sensitive to bad news in banking, including recent ones, given its representative nature and function. 

Punjab & Maharashtra Co-operative (PMC) Bank

The cooperative bank, PMC, saw severe restrictions levied on it by RBI on September 2019, following 73 per cent of its advances given to HDIL that went belly-up. Even its retail depositors were barred from withdrawing their own savings. The tremors in the sector extended to Bank Nifty as well. The dent in public confidence in the banking sector took a toll. On September 25, 2019, it opened at around 400 points lower than the previous day, as shown below:-

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Yes Bank Crisis

The Yes Bank crisis in October 2019 hit the Bank Nifty worse than PMC. Yes Bank held a weightage of 5.2 percent in the index, and it has fallen from a high of Rs 393 in August  2018, to Rs 46.75 in December 2019. It was on October 1, 2019, that its share price nosedived 22.8 percent to Rs 32 a share, following the news of the sale of pledged shares of promoters. The Bank Nifty took it hard, as it plummeted and opened at around 450 points lower on 3rd October 2019. The slide continued for a few more days.

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Covid-19 impact

A fall in the Nifty Bank Index can be seen around mid-March 2020, symbolizing the impact of the Covid-19 pandemic and the nationwide lockdown on the banking sector.

From the above Bank Nifty Chart, it can be seen that the index has risen from the downturn it faced in March 2020. In December 2022, the Bank Nifty Index touched an all-time high at 44,151. 

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Russia – Ukraine Conflict

From the above Bank Nifty Chart, It can be seen that the Nifty Bank index experienced a significant decline of nearly 4% following the announcement of the Russia-Ukraine War, highlighting the vulnerability of Bank Nifty to macroeconomic trends. From March to June 2022, the Bank Nifty fell by almost 10% due to the impact of the war. 

Click here for more information on Russia – Ukraine conflict.

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Silicon Valley Bank Collapse

From the above graph, We can see that Nifty Bank fell hugely. The Nifty Bank index witnessed a significant loss of Rs 1.33 lakh crore over three trading sessions from March 10 to March 14, 2023. This 4% decline was triggered by the collapse of Silicon Valley Bank (SVB) on March 9. 

Click here to know why and how SVB bank collapsed. 

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Is the Bank Nifty Relevant?

The Indian banking space has 22 private sector banks, 12 public sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks, and 94,384 rural cooperative banks. It may seem unfair to use an index of 12 bank Nifty stocks to gauge the performance of such a spread of players. 

But indices are meant for arming us with a statistical measure to track the overall performance of a market or one of its sections. In this case, a section of the stock market.

The formula for the Nifty bank index is such that it becomes comparable against the constituents of the market, ie. bank Nifty stocks, in this case. Their performance at the bourse may be measured against the index, giving equity shareholders of banks and day traders of bank stocks an additional tool apart from the overall market index, the Nifty 50.

Bank Nifty vs S&P BSE Bankex

The Bank Nifty index is not the only Indian bank index. There is the S&P BSE Bankex index as well, on the rival BSE. 

The key differences between the two are:-

1. The S&P BSE Bankex index is made up of 10 stocks, while NSE’s Bank Nifty has 12 stocks as its constituents. They have nine constituting bank stocks common.
2. The trading volume on the S&P BSE Bankex index is thinner compared to the Bank Nifty.
3. The S&P BSE Bankex index is more progressive than the Bank Nifty in one aspect. It accounts for an ESG (environment, social, and governance) factor called the ESG carbon characteristics. It shows the extent of environmental damage, if any, inflicted by the constituting banks, valuable information for the conscionable investor.

5-Year Performance Comparison between Nifty Bank and BSE Sensex

Source: Google Finance, Tavaga Research | as of 13th April 2023

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Bank Indices Around the World

The banking sector can make or mar the financial fabric the world over, as seen in the 2008 subprime crisis and its ripples across the globe.

Tracking its performance are many indices such as the KBW Nasdaq Global Bank Index (US), and Dow Jones US Bank Index. The KBW bank index is one of the oldest bank indices, established in 1991. 

MSCI World Banks Index

The MSCI World Banks Index consists of large-cap and mid-cap stocks belonging to the Banks industry group according to the Global Industry Classification Standards (GICS). The stocks are constituted into the index from 23 developed market countries.

Cumulative and Annual Performance of the MSCI World Banks Index and Comparison with Other Global Indices

Source: MSCI, Tavaga Research

Top 10 Constituents of the MSCI World Banks Index and their Weightage

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Different Types of Indices at NSE

NSE has many more indices than the Nifty 50 and the Bank Nifty. It has categorized the indices as follows. :-

Broad market indices: These are the indices that track the broad market or overall stock market.

Some of the popular examples are the Nifty 50, Nifty Next 50, Nifty 100, Nifty 200, and Nifty Midcap 50

1-Year Performance Comparison between Nifty 50 and Nifty Next 50

Sectoral Indices: These are indices that track market sectors and include Nifty bank, Nifty auto, Nifty IT, Nifty media, and Nifty metal.

1-Year Performace Comparison between Nifty Bank and Nifty Auto

Source: Google Finance, Tavaga Research | as of 13th April 2023

Thematic Indices: These are indices tracking a theme of investment such as public sector stocks, and MNC stocks. For example, there is the Nifty commodities, Nifty CPSE, and Nifty energy.

Source: Google Finance, Tavaga Research | as of 13th April 2023

1-Year Performance Comparison between Nifty Energy and Nifty Infrastructure

Source: Google Finance, Tavaga Research | as of 13th April 2023

Fixed-income Indices: These indices are a benchmark for fixed-income securities such as government bonds. The Nifty GS 10-year and Nifty GS composite are some examples.

Of course, the Bank Nifty is one of the more popular indices at the NSE, and understandably so. 

As banks creak under the piles of bad loans and their asset quality comes under a cloud, it has to be seen how the index holds up with upsets in the sector.

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