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RBI Keeps the Interest Rate Unchanged. Were Smart Money already aware about this?

India’s benchmark index Nifty rallied 630 points in last four trading sessions and today (6th April 2023) RBI decided unanimously to keep the interest rate unchanged. So, are these two events connected? What really happened? Let’s try to understand...

The Rate Cut Expectation

In order to understand what happened, we need to focus on the objectives of interest rate change and how the RBI plans to achieve those objectives. At the onset we must know that the RBI Rate helps maintain stability of the Indian economy and propel it towards a growth trajectory. Therefore, a rate cut is an act of lowering the cost of credit to push up the demand curve. The purpose is to balance the economy and the stock market by creating a win-win situation for business borrowings and equity investors at the same time. This is where the action happened.

Why did Nifty Rise?

630 points rally in Nifty can be directly linked to the RBI’s aggressive stance in its forward guidance. Smart money already knew there will be no rate cut or rate hike. It shall remain unchanged. 29th march to 31st march was the time when premium calculation indicated an up move based on put selling. If rate cut would’ve happened, call sellers would’ve surrendered on Monday itself. Smart money are called smart for a reason.

We had 2 trading holidays on 6th April 2023 expiry, making it only 3 trading days coupled with the weekend. Option sellers saw this as a paradise and accordingly initiated several ratios.

Institutional buyers entered the market with full force on 31st March 2023. The same was indicated in our 3D Delta software and shared to our subscribers on 3rd April 2023 newsletter. Since they had bought futures, they had to sell the options to hedge. For the first 2 sessions, they had initiated spreads in such a manner that they were earning on both call and put selling. From Monday 2nd half, they had to cover their call shorts and go all out in put selling.

As our principle, we followed the institutions, we had range spread, where premiums asked us to take a contra sell trade at 17,386 with SL of 17,414. So, if 17,414 comes in future, you must exit the sell trade and enter into long with diversified quantities and ratios. The target for the long trade was 17,550 and 17,634. We all know what happened to markets after that. This was taught to our current batch, and everyone witnessed over the whole week.

Trading Without Predictions

Trading can be very rewarding if we avoid predictions and follow the institutional traders during events like the RBI policy. Most traders would pop question like, what if I miss out. The answer is, stop spinning those unnecessary ideas in your mind. Simply avoid building positions when the market makers do not participate. In this week’s session for instance, it was very simple to execute longs.

The RBI decision to keep rates unchanged was laced with the rally by smart money. All we needed was a premium calculation, strike selection and the arrival of the binomial price. Once the binomial price triggered, we went long in 17,450 CE options and sold 17,650 CE in ratio of 1:2, which means we bought 1 lot of 17,450 CE and sold 2 lots of 17,650 CE. This spread was executed at a mere debit of INR 11. Same spread was squared off today at a whopping debit of INR 150. A clean 139 points gain with proper hedge.

Still sitting there and wondering how it happened? Join our courses and see it yourself.

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