A very simple explanation as to why a rally in the banking index has resulted in nifty touching 8600

Futures of private sector banks were in very heavy demand as bullish traders took up long positions on these derivatives after the government tweaked its definition of foreign holding across sectors, benefiting mainly the lenders.

The government has now introduced a composite percentage cap on the extent foreigners can own Indian shares. Earlier, there were separate sub-limits which would cater to FDI, FII, NRI and other non-Indian holdings within the overall cap which was different for each sector. For instance, in banking 74 percent equity in an Indian private bank can be owned by foreigners.

Within the 74 percent, the foreign institutional limit was capped at 49 percent. Now these artificial sub-limits have been removed by the government. In practice, the entire 74 percent cap can now consist of foreign institutional interest in a private bank.

The change hit the F&O market with a storm. Axis Bank Futures surged 4.5 percent to 612.75 rupees. It was the top traded future in the derivatives space. Its Open Interest surged 13 percent, the top most, in the banking space and traded volumes surged 220 percent over yesterday. Axis Bank's earlier 49 percent FII cap was almost exhausted. Now, foreigners can buy up to 74 percent of its equity.

Kotak Bank futures jumped 4.1 percent to 744.75 rupees. Their OI rose 4.4 percent and traded volumes were 175 percent higher overWednesday.

Yes Bank futures leapt 3.7 percent to 837.90 rupees. Traded volumes jumped 106 percent.

ICICI Bank's futures showed an OI rise of 9.7 percent coupled with an 80 percent rise in traded volumes.

HDFC Bank's futures traded volumes gained 59 percent.

(Image credit: Indiatimes)