RSI Indicator: Overbought, Oversold and Divergence

What the RSI indicator actually measures

The RSI indicator, short for Relative Strength Index, is one of the most widely used tools on any NSE or BSE chart, and also one of the most misunderstood. At its heart the RSI indicator is a momentum oscillator. It does not tell you the price of NIFTY or Reliance. Instead it tells you how forceful the recent up moves have been compared with the recent down moves, and it packs that information into a single number between 0 and 100.

The indicator was created by J. Welles Wilder Jr. and introduced in 1978 in his book on technical trading systems. Decades later it still appears in almost every charting platform because the idea behind it is simple and durable. When buyers are in control, closing prices tend to finish higher session after session, and when sellers take over, closes drift lower. The RSI turns that tug of war into a smooth line you can read at a glance.

It also helps to know what the word relative means here. The RSI does not compare one stock against another, despite the name. It compares a market against its own recent self, weighing this period strength against this period weakness. So a high RSI on Reliance is a statement about Reliance over the last few sessions, not a claim that Reliance is stronger than HDFC Bank. Keeping this in mind prevents a common confusion between the RSI and the separate idea of comparing relative strength across different stocks.

Because the value is bounded between 0 and 100, the RSI lets you compare momentum across very different instruments on the same scale. An RSI of 65 on Bank Nifty means the same thing in momentum terms as an RSI of 65 on HDFC Bank, even though one trades near 54,000 and the other near ₹1,680. That common scale is exactly why traders reach for the RSI indicator when they want a quick read on whether a move is gathering strength or running out of breath.

Throughout this guide, treat the RSI as a way of thinking about momentum rather than a magic signal. Everything here is educational and not financial advice, and the goal is to help you read the indicator the way an experienced trader does, with context and patience rather than reflex.

How the RSI indicator is calculated, conceptually

You do not need to compute the RSI by hand, your platform does it for you, but understanding the recipe stops you from misreading the line. The standard setting looks at the last 14 candles. For each candle the platform notes whether the close finished above or below the previous close, and by how much. Up moves are collected as gains and down moves are collected as losses.

The platform then takes the average gain and the average loss over those 14 candles. The ratio of average gain to average loss is called the relative strength, often shortened to RS. A market that has been rising steadily will have a large average gain and a small average loss, so RS is high. A falling market produces the opposite, with small gains and large losses.

Why 14 candles? Wilder chose roughly half of a typical market cycle of his era, and the number simply stuck because it works well in practice. On a daily chart, 14 candles cover about three trading weeks, which is long enough to smooth out daily noise yet short enough to react when momentum genuinely shifts. You can change it, but it helps to understand that the period sets the memory of the indicator. A longer period remembers more history and reacts more slowly, while a shorter period forgets quickly and reacts fast.

The final step squeezes RS into the 0 to 100 range. The RSI equals 100 minus 100 divided by the sum of 1 and RS. The arithmetic matters less than the behaviour it produces. When almost every recent candle is green the line pushes toward 100, when almost every candle is red it sinks toward 0, and when gains and losses are balanced the line sits near 50.

One important detail is smoothing. Wilder did not use a plain average that drops off sharply after 14 candles. He used a smoothed average that keeps a small memory of older data, which is why the RSI line glides rather than jumps. This smoothing is also why a single dramatic candle nudges the line but rarely sends it from one extreme to the other in a single step. The practical lesson is that the RSI describes a stretch of price action, not just the latest tick.

Reading the 70 and 30 levels: overbought and oversold

The two numbers every trader quotes are 70 and 30. When the RSI rises above 70 the market is described as overbought, meaning the recent up moves have been unusually strong and a pause or pullback becomes more likely. When the RSI falls below 30 the market is oversold, meaning sellers have been dominant and a bounce becomes more likely.

Notice the careful wording: more likely, not certain. Overbought does not mean the price must fall, and oversold does not mean it must rise. These levels are alerts that ask you to pay attention, not triggers that demand a trade. A stock such as Reliance can print an RSI of 75 and keep climbing for several more sessions if the buying behind the move is genuine.

It is worth separating two questions that the levels can answer. The first is whether momentum is stretched, which 70 and 30 address directly. The second is whether the move is likely to reverse, which the levels alone cannot answer, because that depends on the trend and on the support and resistance around price. New traders collapse these two questions into one and assume stretched means about to reverse. Keeping them apart, asking first how stretched and then how likely to turn, is one of the quiet shifts that separates a thoughtful RSI user from a reflexive one.

Some traders shift the levels to 80 and 20 to filter out noise, especially on volatile instruments or shorter timeframes. Wider levels produce fewer signals but each one carries more weight. Narrower levels such as 65 and 35 produce more signals but more false alarms. The right choice depends on the instrument and your style, which is one reason testing on a paper account first is so valuable.

A practical way to use the levels is to wait for confirmation. Rather than selling the instant the RSI on NIFTY touches 70, many traders wait for the line to fall back below 70, which signals that momentum has actually started to cool. The same logic in reverse applies at 30, where a buyer waits for the line to climb back above 30 rather than trying to catch a falling knife while sellers are still in charge.

Why the RSI indicator stays extreme in strong trends

Here is the single most expensive lesson new traders learn about the RSI indicator. In a powerful trend the line can sit above 70 or below 30 for days or even weeks. A beginner who shorts every overbought reading in a roaring bull market, or buys every oversold reading in a steep fall, gets run over again and again.

The reason is mechanical. Overbought simply means recent gains have been large relative to losses. In a strong uptrend that condition is not a warning, it is the definition of the trend itself. The RSI is doing its job correctly by staying high. The mistake is the trader interpretation, not the indicator.

Constance Brown, a respected market technician, observed that the effective range of the RSI shifts with the trend. In a healthy bull market the line often travels between roughly 40 and 90, using the 40 to 50 zone as support rather than the textbook 30. In a bear market it tends to range between about 10 and 60, with the 50 to 60 zone acting as resistance. This insight reframes the whole indicator, because the levels that matter move with the market mood.

A useful mental model is that the RSI is describing speed, not position. A car can travel at high speed for a long time without crashing, and in the same way a market can stay overbought while it keeps trending. What eventually matters is when the speed starts to fade, which is why momentum slowing down, rather than momentum simply being high, is the real signal worth watching.

The practical takeaway is to read the RSI in context. If NIFTY is making higher highs and higher lows on the daily chart and the RSI keeps tagging 75, that is strength to respect, not strength to fade. Save your oversold buys for ranging markets, and in trends look for shallow dips toward the 40 to 50 band instead of waiting for a textbook reading that may never arrive.

RSI in a range versus RSI in a trend

The RSI behaves like two different tools depending on whether the market is ranging or trending, so your first job is to decide which environment you are in. A ranging market moves sideways between a ceiling and a floor. A trending market builds a staircase of higher highs and higher lows, or lower highs and lower lows.

In a clean range the textbook RSI works beautifully. The line swings up to 70 near the top of the range and down to 30 near the bottom, and these turns often line up with price reversing off support and resistance. This is the classic mean reversion use, where you expect price to return toward its average after stretching too far in one direction.

In a trend the same overbought and oversold signals become traps, as we saw above. Here the RSI is more useful as a momentum and pullback tool. You watch for the line to dip into the 40 to 50 region during an uptrend and then turn up again, which often marks the end of a healthy pause before the trend resumes.

A simple way to label the environment is to glance at a longer moving average. When the 50 session average is rising and price sits above it, treat the chart as trending and lean on the RSI for pullback entries. When the average is flat and price keeps crossing it, treat the chart as ranging and let the RSI fade the extremes. The average is not magic, but it forces you to make the trend decision before the oscillator tempts you into a trade.

How do you tell the two apart? Look at price structure first and the RSI second. Use a moving average, a trendline, or simply the pattern of highs and lows to judge the environment. Once you know whether you are ranging or trending, you know which RSI playbook to run. This ordering, structure first and oscillator second, is one of the most important habits a developing trader can build.

Bullish divergence: when price and the RSI disagree

Divergence is where the RSI indicator becomes genuinely powerful, because it can warn you about a possible turn before price itself confirms it. Bullish divergence happens when price makes a lower low but the RSI makes a higher low. In plain terms, price dropped to a fresh bottom, but the downward momentum behind that drop was weaker than before.

Picture HDFC Bank falling from ₹1,720 to ₹1,650 and then, after a small bounce, sliding again to ₹1,630. The second low in price is clearly lower. But suppose the RSI printed 28 at the first low and only 34 at the second low. Price went lower while the RSI went higher. That gap is the divergence, and it suggests sellers are losing steam even though the price is still falling.

Bullish divergence is not a buy signal on its own. It is a heads up that the down move may be tiring. Careful traders wait for price to confirm, for example with a strong green candle that closes back above a recent swing high, or with the RSI itself climbing back above 30 or above its own short downtrend line. Confirmation turns a warning into an actionable setup.

There are also degrees of divergence worth knowing. Regular divergence, the kind described here, warns of a possible reversal. Hidden divergence points the other way and signals trend continuation, where in an uptrend price makes a higher low while the RSI makes a lower low, which often marks a healthy pause before the next leg up. Beginners should master regular divergence first, but hidden divergence becomes a useful tool once you can read the trend cleanly.

Divergence works best at the end of an extended move rather than in the middle of one. A divergence that appears after price has already fallen for many sessions, near a known support level, carries far more weight than one that pops up in the middle of a choppy range. Context, once again, decides almost everything about whether the signal is worth trading.

Bearish divergence and the failure swing

Bearish divergence is the mirror image. Price makes a higher high but the RSI makes a lower high. The market pushed to a new peak, yet the momentum behind that peak was weaker than the one before it, hinting that buyers are running out of fuel.

Imagine NIFTY rallying to 24,900, pulling back, and then pushing to a new high of 25,050. On the surface this looks bullish. But if the RSI made 78 at 24,900 and only 71 at 25,050, the indicator is quietly disagreeing. The fresh high in price was not matched by a fresh high in momentum. That is bearish divergence, a classic late trend warning.

Wilder also described a related pattern he called the failure swing, which does not depend on price at all. A bearish failure swing occurs when the RSI rises above 70, pulls back, rallies again but fails to exceed its previous peak, and then breaks below the low of the intervening dip. This pure momentum signal can be cleaner than divergence because it is read entirely from the RSI line itself.

The same logic works in reverse for a bullish setup, which is worth spelling out because the symmetry makes the idea stick. A bullish failure swing forms when the RSI drops below 30, bounces, falls again but holds above its previous low, and then breaks above the high of the small bounce. Whether bullish or bearish, the failure swing is really a momentum trader saying that the latest push could not better the one before it, so the balance of power may be quietly changing hands.

As with bullish divergence, never trade bearish divergence in isolation, and never assume it must play out. Strong trends can absorb several divergences before they finally turn. The disciplined approach is to mark the divergence, wait for price confirmation such as a break of a swing low, and size the position so that being wrong is survivable rather than ruinous.

The 50 line: the centreline most traders ignore

Everyone watches 70 and 30, but the 50 line in the middle quietly carries a lot of information. Because 50 is the point where average gains and average losses are roughly balanced, it acts as a dividing line between bullish and bearish momentum. When the RSI holds above 50, buyers have the upper hand. When it stays below 50, sellers do.

This makes the centreline a useful trend filter. Many trend followers will only take long setups when the RSI is above 50 and only short setups when it is below 50, which keeps them on the right side of momentum. A simple rule like that can stop you from fighting a strong move just because an oscillator looked extreme for a moment.

Crossings of the 50 line can also act as early signals. When the RSI climbs from below 50 to above it on a stock such as Reliance, momentum has flipped from negative to positive, which sometimes precedes a fresh leg up. Combined with price breaking a resistance level, a 50 line cross adds confidence to the read rather than standing alone.

You can combine the centreline with the extremes for a fuller picture. A market that swings between 40 and 80 and keeps using 40 to 50 as a floor is telling you the bulls are in charge. A market that swings between 20 and 60 and keeps stalling near 50 to 60 is telling you the bears are. Reading where the line bounces and where it stalls, rather than only watching for 70 and 30, turns the RSI from a simple alert into a map of who controls the market.

The centreline is especially handy on higher timeframes. On a weekly chart, an RSI that respects 40 to 50 as support during pullbacks tells you the larger trend is still intact. The session it decisively loses that zone is the moment to ask whether the bigger picture is starting to change.

RSI settings: period, levels and timeframe

The default RSI period is 14, and for good reason. It balances sensitivity and stability across most instruments and timeframes. A shorter period such as 9 or 7 makes the line more reactive, producing more overbought and oversold signals, which suits fast intraday trading but also generates more noise. A longer period such as 21 smooths the line further and suits position traders who want fewer, steadier signals.

There is no single best setting, and chasing the perfect number is a common time sink. A more useful mindset is to pick a setting that matches your timeframe and then stay consistent so you actually learn how it behaves. A scalper on a 5 minute Bank Nifty chart might use a 7 period RSI with 80 and 20 levels, while a swing trader on the daily NIFTY chart might keep the classic 14 period with 70 and 30.

Timeframe matters as much as the period. The RSI on a 5 minute chart and the RSI on a daily chart can point in opposite directions at the same moment, and both can be correct for their own horizon. Many traders read a higher timeframe first to set the bias and then drop to a lower timeframe to time the entry, a method often called top down analysis.

Resist the urge to optimise the period to a value that looks perfect on past data. This habit, sometimes called curve fitting, produces a setting tuned to noise that has already happened rather than to how markets behave in general. A robust setting works reasonably across many instruments and many market phases, even if it is never the very best on any single chart. The classic 14 period survives precisely because it is good enough almost everywhere.

Whatever you choose, write it into your trading plan and test it before committing real money. A setting that looks brilliant on one screenshot can behave very differently across hundreds of trades. This is exactly the kind of question a paper trading account is built to answer, because it lets you gather that evidence without risking a single rupee.

Stochastic RSI and other RSI variations

Once you are comfortable with the standard RSI, you will meet several variations built on top of it. The most popular is the Stochastic RSI, which applies the stochastic formula to the RSI line rather than to price. In effect it measures where the current RSI sits within its own recent high to low range, which makes it far more sensitive. The Stochastic RSI swings between 0 and 1, or 0 and 100 on some platforms, and reaches its extremes much more often than the plain RSI.

That extra sensitivity is a double edged quality. The Stochastic RSI is excellent for spotting short term turning points inside a range, but it whipsaws badly in a trend, firing overbought and oversold signals far too early. Many traders use it only on lower timeframes for timing, while keeping the ordinary RSI on a higher timeframe to set the bias. As a rule, the faster the tool, the more confirmation it needs before you act on it.

Another variation you may meet is a smoothed or longer period RSI used on noisy intraday charts, where a 21 period setting calms the line enough to be readable. Some traders also plot a moving average of the RSI itself and treat crosses of that average as signals, much like a signal line on the MACD. These tweaks do not change the core idea, they simply trade some responsiveness for smoothness or the other way round.

The lesson is to add variations only when they solve a real problem you have seen in your own trading, not because they look sophisticated. A clean standard RSI, understood deeply, will serve most retail traders better than a screen crowded with exotic oscillators. Test any variation on a paper account across many trades before you trust it with real money, and keep only the version that genuinely improves your decisions.

Worked example: reading the RSI on a NIFTY daily chart

Suppose NIFTY has been grinding higher for six weeks and trades around 24,800 on the daily chart. Over that stretch the RSI has repeatedly tagged 72 to 76 and then eased back to about 45 during pullbacks, without ever closing below 40. A trader who understands trends reads this clearly. The market is strong, the overbought readings are confirmation rather than warnings, and the 40 to 45 dips are where buyers keep stepping in.

Now imagine a pullback drags the RSI down to 44 while NIFTY holds above a rising 20 session moving average near 24,500. For a trend follower this is the setup, not the overbought tags from earlier. Momentum has cooled into the support band of a bull market, and a turn back up in the RSI would suggest the trend is resuming.

Contrast that with a beginner who shorted NIFTY the first time the RSI hit 72 three weeks earlier. That trade fought a strong trend on a textbook signal taken out of context, and the market simply kept climbing. The difference between the two traders is not the indicator, which both saw on the same screen, but the interpretation of the environment around it.

This is also where India specific mechanics enter the picture. If you expressed the view through index options on a SEBI regulated exchange like the NSE, remember that NIFTY options are cash settled. NIFTY has a weekly expiry every Tuesday and a monthly expiry on the last Tuesday, and at the time of writing the lot size is 65, so one lot of a ₹120 premium represents an outlay of ₹7,800 before charges. The exchange revises lot sizes from time to time, so always check the latest NSE circular before you trade. Costs such as STT and brokerage carry 18 percent GST, and these expenses nibble at every trade, which is one more reason not to act on weak signals.

Worked example: a Bank Nifty divergence trade

Bank Nifty is more volatile than NIFTY, which makes it a good stage for divergence. Suppose Bank Nifty rallies hard into an event and prints a high near 54,600, with the RSI at 79. After a dip it pushes to a marginally higher high of 54,750, but this time the RSI only reaches 70. Price made a higher high while the RSI made a lower high, which is textbook bearish divergence.

A disciplined trader does not short the instant the second high prints. Instead they mark the swing low of the dip between the two highs, say 53,900, and wait. If Bank Nifty then breaks below 53,900 on strong volume, the divergence has been confirmed by price, and the odds of a deeper pullback have improved.

On the position side, Bank Nifty options are cash settled, and unlike NIFTY they no longer carry a weekly expiry, trading only as a monthly contract that expires on the last Tuesday. At the time of writing the lot size is 30, and since the exchange revises lot sizes periodically you should confirm the current figure in the latest NSE circular. If a put option is trading at ₹300, one lot of 30 represents ₹9,000 of premium before charges. Suppose the trader buys one lot and the view plays out, with the put rising to ₹460. The gross gain is ₹160 times 30, which is ₹4,800, before brokerage, STT, exchange fees and the 18 percent GST applied on those charges. Always work in net numbers, because the costs are real and they add up quickly for active traders.

Equally important is the plan for being wrong. If Bank Nifty instead reclaims 54,750 and the RSI pushes back above its earlier peak, the divergence has failed and the reason for the trade has vanished. A pre decided exit, whether a stop on the option premium or a level on the index, keeps a failed idea from becoming a large loss. Indian index trades settle in cash, so there is no delivery to manage, but the discipline of cutting a broken thesis is exactly the same.

Position sizing and risk around RSI trades

No indicator, including the RSI, removes the need for risk management, and a good oscillator can even lull you into overconfidence. The single most important number in any trade is not the RSI reading but the amount you are prepared to lose if you are wrong. A common guideline among disciplined traders is to risk only a small fraction of capital, often around one to two percent, on any single idea.

Work through a simple example. Suppose your trading capital is ₹2,00,000 and you decide to risk one percent, which is ₹2,000, on a Bank Nifty options trade triggered by a bearish divergence. If you buy one lot of a put at ₹300 with a lot size of 30, the position is worth ₹9,000, and a fall in the premium to about ₹233 would cost roughly your ₹2,000 limit. Knowing this in advance tells you exactly where your stop belongs and whether the trade even fits your risk budget.

Position sizing turns the RSI from a signal generator into part of a complete plan. A high quality setup, such as a divergence confirmed by a break of structure near major support, may justify a full position. A weaker signal, such as a single overbought tag in a strong trend, may justify no position at all. Letting the quality of the setup decide the size is how steady traders survive the losing streaks that would wipe out a reckless one.

Finally, account for costs in your risk maths, because they are part of the loss. Brokerage, STT, exchange fees and the 18 percent GST on those charges all reduce your net result, and frequent RSI scalping multiplies them. A setup that looks marginally profitable before costs can become a net loser after them. Practising this full calculation on a First Plan India paper account, where you can see the effect of costs without real money at stake, builds the habit before it matters.

Common mistakes Indian retail traders make with the RSI

The RSI is simple to plot and easy to misuse, and the same handful of mistakes show up again and again on retail screens. Recognising them is half the battle, because once you can name a mistake you can usually catch yourself before you repeat it.

• Treating 70 and 30 as automatic sell and buy buttons instead of alerts that need context.
• Fading strong trends because the line looks overbought, then watching it stay overbought for weeks.
• Trading every tiny divergence, including ones in the middle of choppy ranges where they mean little.
• Switching the period setting after every losing trade, so no real data is ever gathered on any one setting.
• Reading the RSI in isolation, with no look at price structure, support, resistance or volume.
• Ignoring costs, so a long string of small RSI scalps quietly bleeds away to brokerage, STT and GST.

The RSI summarises momentum, but it cannot do your thinking for you.

Combining the RSI with other tools

The RSI shines when it is one voice in a small chorus rather than a soloist. The goal is confluence, where several independent reasons point the same way, which raises the quality of a setup without drowning your chart in indicators that all repeat the same message.

A natural partner is price structure. Support and resistance levels, trendlines, and the pattern of highs and lows tell you the environment, and the RSI then helps time the entry within it. An oversold RSI that lines up with a major support level is far more interesting than an oversold reading floating in open space with nothing around it.

Candlestick patterns are another natural fit. A bullish divergence that lines up with a hammer or a bullish engulfing candle at support gives you two independent reasons to act, one from momentum and one from price action. The RSI tells you the down move is tiring, and the candle shows buyers stepping in, and together they make a far stronger case than either signal alone.

Moving averages pair well too. Using a moving average to define the trend and the RSI to time pullbacks gives you a clean division of labour. The average answers which way, the oscillator answers when. Volume adds a third dimension, since a bearish divergence confirmed by falling volume into the high is more convincing than one without that supporting evidence.

Be careful not to stack tools that all measure the same thing. Adding the stochastic, the MACD and the RSI together can feel like confirmation, but momentum oscillators tend to agree with one another, so you are really just hearing the same opinion three times. One momentum tool, read well alongside price and volume, is usually enough.

Practising the RSI on a paper trading account

Reading about the RSI and using it under live pressure are two very different things. The fastest way to internalise everything above, the difference between a range and a trend, the patience to wait for confirmation, and the discipline to skip a weak divergence, is to practise on a paper trading account where the stakes are learning rather than money.

First Plan India is built for exactly this kind of practice. You can plot the RSI on NIFTY, Bank Nifty, Reliance or HDFC Bank, take simulated trades, and review afterwards which signals worked and which did not, all without risking a rupee. Because the platform mirrors real instruments, current lot sizes such as 65 for NIFTY and 30 for Bank Nifty, which the exchange revises from time to time so you should check the latest NSE circular, and realistic costs, the habits you build transfer cleanly when you are ready to trade live. For cash equity such as buying Reliance shares, remember that delivery settles on a T plus 1 basis, while index options are cash settled.

A good practice routine is to keep a simple journal. Note the environment, the RSI reading, your reason for the trade, and the result. After fifty trades you will have your own evidence about how the RSI behaves on the instruments you actually trade, which is worth far more than any general rule copied from the internet.

Reviewing what you record is where the real learning happens, not in taking the trades. Once a week, open your journal and sort the entries into winners and losers, then look for patterns. You may find that almost every losing RSI trade was an overbought signal taken against a strong trend, or that your best trades were divergences confirmed at support. That kind of feedback, drawn from your own decisions on real Indian instruments, is far more valuable than any rule you read, and it costs nothing but honesty and a little time.

Finally, remember that this article is educational and not financial advice. The RSI is a tool for thinking about momentum, not a crystal ball, and no indicator removes the risk that is built into markets. Learn it patiently, combine it with sound risk management, and let a paper account carry the cost of your early mistakes so your real capital does not have to.

Frequently asked questions

What is the RSI indicator in simple terms?

The RSI indicator, or Relative Strength Index, is a momentum oscillator that moves between 0 and 100. It compares the size of recent gains with recent losses to show how strong a price move is. High readings mean buyers have been dominant and low readings mean sellers have been dominant.

What do the 70 and 30 levels mean on the RSI?

A reading above 70 is called overbought and suggests the recent up move has been unusually strong, so a pause or pullback is more likely. A reading below 30 is called oversold and suggests sellers have dominated, so a bounce is more likely. Both are alerts to investigate, not automatic buy or sell signals.

Why does the RSI stay above 70 in a strong uptrend?

Because overbought simply means recent gains are large compared with losses, which is exactly what a strong uptrend produces. In powerful trends the RSI can stay above 70 for many sessions. The indicator is working correctly, and the error is treating a high reading as a sell signal during a clear trend.

What is RSI divergence?

Divergence is when price and the RSI move in opposite directions. Bullish divergence is a lower low in price with a higher low in the RSI, hinting that selling is weakening. Bearish divergence is a higher high in price with a lower high in the RSI, hinting that buying is weakening. It is a warning that needs price confirmation before you act.

What are good RSI settings for intraday trading in India?

Many intraday traders use a shorter period such as 7 or 9 on a 5 minute chart, sometimes with wider 80 and 20 levels to cut noise on volatile instruments like Bank Nifty. There is no single best setting. Pick one that matches your timeframe, keep it consistent, and test it on a paper account before using real money.

Can I use the RSI indicator on its own?

It is better not to. The RSI measures momentum but cannot tell you whether the market is trending or ranging, where the key levels sit, or what volume is doing. Combine it with price structure, support and resistance, and a moving average so several independent factors agree before you take a trade.

Does the RSI work for NIFTY and Bank Nifty options?

The RSI is plotted on the price of the underlying index, such as NIFTY or Bank Nifty, not on the option premium, and traders use that read to inform their option positions. Remember that Indian index options are cash settled. At the time of writing the lot sizes are 65 for NIFTY and 30 for Bank Nifty, and the exchange revises these periodically, so check the latest NSE circular. Charges also carry 18 percent GST, so costs should be part of every decision.

Is the RSI a leading or a lagging indicator?

The RSI is best described as coincident to slightly leading. Because it is built from recent price changes it follows price closely, but features like divergence and the failure swing can warn of a possible turn before price confirms it. Treat those warnings as early flags to watch, not as guarantees of what happens next.