A market can rise in the morning but reverse its direction by noon. Hence, seasoned investors do not base their decisions on a single indicator reflecting the mood of the markets for the day. They study foreign cues, local demand and supply, besides important sectors that determine the trajectory of major indices.
There are a couple of broad indicators that capture varying dimensions of the equity market landscape. One of these reflects general sentiments about India’s equity market ahead of the opening bell. The other is dedicated to the banking sector, which tends to be a major influencer of the daily equity trends.
The Story Behind SGX Nifty
SGX Nifty used to be a popular proxy for tracking the likely opening of India’s equity markets. It was a contract based on the Nifty 50 index, which traded on the Singapore Exchange. Eager investors used to track its movements as a pointer to the mood of the Indian markets, which remained closed during the time.
However, the contracts were delisted from Singapore in July 2023. They began to trade in GIFT City, Gujarat as GIFT Nifty. It is a contract based on the International Financial Services Centre (IFSC) platform of the NSE International Exchange.
While the old name figured in headlines and search terms, not much has changed on the ground. Even today, the GIFT Nifty continues to serve the same purpose as its predecessor. It continues to act as a barometer of the likely equity trends in the country even as the local markets remain shut.
It is true that a rise in the SGX/ GIFT Nifty ahead of the opening bell of the Indian markets is often a positive omen. However, one must remember that it is only an indicator. It does not guarantee a positive trend for the day as global news, currency trends, crude oil prices and fresh economic data can alter the trajectory of the markets.
Why One Early Signal Is Not Enough
Anecdotal evidence suggests that investors who track the early morning signal of the SGX Nifty often get disappointed. It is not that the indicator is incorrect. It is more about the fact that investors must not rely on a single signal to make investment decisions.
One must evaluate the early morning signal in conjunction with the actual opening of the markets in India. There are several such investors who react to the news, book profits on the rising stocks or wait for an important policy announcement and hence, the early morning signal may not always reflect reality.
Therefore, it is a good idea to understand the early morning signal in the context of the markets’ actual behaviour on the day. It is a good idea to track the volume of trade and the number of stocks rising versus those that fall. This will help one understand if there is a buying strike or the mood of the markets is bearish.
What Does Bank Nifty Add to the Picture?
The bank nifty index includes financial services and banking companies that are regularly sold on the National Stock Exchange.
It consists of the most actively traded stocks of public and private banks. Bank Nifty is often a good barometer for the banking sector as a whole, which influences the larger equity market direction.
Positive developments in this sector improve the outlook for the overall economy. That is because the banks are the backbone of the economic activity. They are the providers of credit to various economic activity. If the banks are confident about the growth momentum and the credit demand, it usually ends up supporting the equity markets. The opposite is also true.
However, one must note that the index is only reflective of the banking sector, which constitutes a small part of the overall economy. The valuation of the index is also dependent on the weightage and movement of its constituents.
How to Read Both Indicators Together
It is a good idea to read the early morning signal of the SGX Nifty and the Bank Nifty, which reflects the mood of the markets about the banking sector. If both the indicators point to a positive trend, it is a good omen for the day’s direction.
However, if the two diverge, it is a good idea to analyse the markets more carefully. While the banks’ stocks may be reacting to an interest rate warning, other sectors could be influencing the overall mood of the markets.
