India’s biggest stock selloff in 10 months has done nothing to shake the resolve of bulls in the options market, who say shares will rally as Prime Minister Narendra Modi outlines plans to strengthen the economy. 

The cost of bullish calls on the nation’s CNX Nifty Index rose yesterday, while puts dropped, even as the equity gauge sank 2.1 percent in the biggest retreat since Sept. 3. The gap between bullish and bearish contracts, a gauge of investor demand for protection against losses, fell to 1.1 points, near the record low of 0.67 reached on June 26, according to data compiled by Bloomberg.

Indian stocks have added $206 billion of market value since Modi led his party to the biggest election victory in three decades in May, pledging to encourage foreign investment, create manufacturing jobs and simplify the tax regime. While the rally lifted valuations to the highest levels since 2011, Modi’s first budget due tomorrow may unveil more detailed plans to boost economic growth from near the weakest pace in a decade.

“The path to economic reforms won’t be easy, but investors feel that the budget will create a positive first impression,” R.K. Gupta, managing director of New Delhi-based Taurus Asset Management Co., which oversees about $686 million, said in a phone interview yesterday. “That optimism is helping them to keep their options positions even as they sell stocks.”

David Fuller's view

Emerging markets can be volatile and international investors have been ‘climbing a wall of worry’ generally.  This is often the case when many stock markets are doing well, and the international press loves bearish stories.  There are also some high-profile people who may have sold too soon or are underweight and would therefore like to talk their markets of interest down.  It is all part of the ‘market noise’. 

This does not mean that we should be complacent when Wall Street’s bull market is in its sixth year and valuations have been running ahead of growth in corporate profits.  Wall Street’s next 10% plus correction – an inevitable event - will send shock waves around the world.  It is overdue and could therefore occur at any time for a number of reasons, both known and unknown. 

However, I am not concerned about India’s budget which will be delivered on Thursday.  Narendra Modi, more than most politicians, knows what needs to be done to generate lasting economic growth.  He also has a strong mandate, enabling him to make tough decisions, not least in terms of populist subsidies, that are in India’s long-term interests.  If India’s budget produces a little volatility to the downside, that will provide another buying opportunity, in my opinion.