Options traders are making the most bearish bets in a year against India, Asia's worst-performing stock market, before the central bank meets to consider extending a record series of interest-rate increases.

Prices for three-month puts to sell the S&P CNX Nifty Index have climbed 62 percent higher than calls to buy, and they reached 66 percent on Aug. 22, the highest since September 2010, according to data compiled by Bloomberg. Open interest for September 4,500 puts has jumped by 24,547 in the past week to 111,264 for the largest increase among all contracts on the benchmark index, which has slid 19 percent this year to 4,940.95, the data show.

Investor confidence is waning on concern that the Reserve Bank of India's five rate increases this year may compound the effects of a global economic slowdown on corporate profits. The highest inflation among major Asian economies may force the central bank to raise borrowing costs on Sept. 16, two days after the government releases data that may show inflation rose.

"Investors are buying puts as rising rates will continue to slow production," Arun Khurana, a Mumbai-based fund manager at UTI Asset Management Co., said in a telephone interview on Sept. 12. The mutual fund company is the nation's fourth largest, with $15 billion in assets. "Consumption isn't slowing and that is pushing inflation higher. The situation is moving out of the Reserve Bank of India's control."

Growth Slows

The central bank will lift the benchmark repurchase rate by a quarter point, according to all 11 economists in a Bloomberg survey, in an attempt to curb wholesale-price inflation that stayed above 9 percent for an eighth straight month in July. The rate has risen 1.75 percentage points this year to 8 percent. Factory production in July grew at the slowest pace in almost two years as consumer demand moderated after the rate increases, government data showed Sept. 12.

The India VIX rose 0.1 percent to 32.77 yesterday, near the two-year high of 34.88 reached on Aug. 9. The gauge of prices for Nifty options and expected share-price swings has averaged 30.75 in its almost four-year history. The Chicago Board Options Exchange Volatility Index fell 4.4 percent to 36.91 yesterday, while Europe's VStoxx volatility gauge lost 8.3 percent to 49.12.

Morgan Stanley cut its year-end estimate for the BSE India Sensitive Index, another benchmark gauge of the nation's equities, on Aug. 18 by 15 percent to 18,850. CLSA Asia-Pacific Markets lowered its forecast to 18,200 from 19,500 on Aug. 24.

'Constrained'

"It would be negative in the near term if they decide to increase rates," Seth Freeman, chief executive officer at EM Capital Management LLC in San Francisco, said about India yesterday in a phone interview. "Revenues are likely to go down because customers are constrained from higher borrowing costs."

Falling commodity prices and the worldwide economic slowdown may ease inflation pressures in developing nations including India, according to Geoffrey Dennis, global emerging- market strategist at Citigroup Inc. in New York.

The S&P GSCI Spot Index of raw materials has declined 13 percent from this year's high on April 8. Brazil's central bank unexpectedly cut interest rates on Aug. 31, while Turkish policy makers reduced borrowing costs to a record low after an unscheduled meeting on Aug. 4.

"The short-term inflation problem, which has been quite tough for emerging markets for the last 12 months, will ease," Dennis said during a Sept. 12 Bloomberg Radio interview. "That's going to help because it means less in the way of interest rate hikes than we thought would be the case a couple of months ago."

Implied Volatility

Nifty put options 10 percent below the index level have an implied volatility of 33.30, compared with 24.10 for calls priced 10 percent above, JPMorgan data show. Implied volatility is the key gauge of prices for options, which become more valuable as swings in the underlying stock or index increase.

September 4,700 puts have the largest open interest of all contracts on the index, with 167,619, followed by 142,526 outstanding September 4,800 contracts. The Nifty hasn't closed below 4,700 since November 2009. There are 1.76 million total puts on the index versus 1.29 million calls.

India's Nifty dropped for a third day yesterday, losing 0.1 percent to 4,940.95. Overseas investors withdrew a net $2.4 billion from Indian equities last month, the most since October 2008, data from the Securities and Exchange Board of India show. That helped send the Nifty down 8.8 percent, the biggest August drop since 1997.

Companies in the Nifty trade at 14.2 times reported profits, compared with a price-earnings ratio of 10.1 for the MSCI Emerging Markets Index.

'Not Justified'

"India's valuation premium over emerging markets is not justified with high inflation and slow growth," Saurabh Mukherjea, the Mumbai-based director of institutional equities at Ambit Capital Pvt, said in a Sept. 9 telephone interview. "Markets will continue to grind lower as the premium should narrow in line with long-term averages." The Reserve Bank may raise rates by another 50 basis points, he said.

Indian stocks are "somewhat overpriced," according to Mark Mobius, who oversees about $50 billion as executive chairman of Templeton Asset Management's emerging markets group. "Inflation at this stage is beginning to moderate but the concern going forward will be growth," he said in a Sept. 7 interview broadcast in India on Bloomberg UTV.

India's economy grew 7.7 percent in the June quarter, beating the 7.6 percent median of 26 estimates in a Bloomberg survey. Its growth was 7.8 percent in the previous three months, the second-fastest rate among the four-nation group including Brazil, Russia and China known as the BRICs.

'Stubborn'

The Reserve Bank of India said on Aug. 25 that price gains may remain "stubborn," which could limit the ability to hold or lower interest-rate levels. India's benchmark wholesale-price inflation was 9.22 percent in July, remaining at more than 9 percent for an eighth straight month. Consumer prices rose 6.5 percent or less in China, Indonesia, South Korea and Thailand for the same period.