Mumbai: Sharp upward movement of NSE's India Volatility Index (VIX), a gauge for market's short term expectation of volatility in the equity market has been quite unnerving for the market participants over the last fortnight since beginning of the general elections.
India VIX has been moving higher and touched a new 52 week high of 23.04 last week on April 18, the last trading session, indicating rising risk in the market.
One month ago India VIX closed at 16.90 and one week ago it was at 21.13 which indicates how it has moved up as countdown to the general elections and led to greater expectation of market volatility among the market participants.
One year ago India VIX closed at 14.26 on April 16, 2018 and its 52 week low is 9.43 on August 24, 2018 indicating market was expecting much lesser volatility then than it is expecting now in the till uncertainty around the outcome of the general elections persists.
This is because the benchmark indices have moved to record highs led by foreign portfolio investors (FPIs) pumping money and it has happened at a time when there is uncertainty around which political formation will form the next government.
According to IFA Global which tracks Indian currency movement against various foreign currencies, "FPIs have utilized 70 per cent of their limit in corporate bonds and 64 per cent of their limit in Government secs. So far, in April, FIIs have infused nearly Rs 13000 cr in the domestic markets on improved domestic sentiment and better prospects of NDA returning to power in the on-going general elections."
Technical and derivatives analysts maintain that volatility seen last week might continue but broader trend in the market is still bullish.
"Yes, the kind of profit booking we saw on Thursday, especially in banking index, it does not augur well. But, we would still like to continue with the broader trend, which is strongly bullish. In between, it's natural to see such hiccups; but it certainly does not warrant any kind of trend reversal, at least at this juncture," said Sameet Chavan, Chief Analyst-Technical and Derivatives, Angel Broking.
Some analysts say India VIX going above 20 may not truly indicate expected market volatility and one has to look at other factors too.
Sandip Raichura - Head of Retail, Prabhudas Lilladher says, "The VIX captures the best quotes for Out of Money Put and Call options to judge the rise in expected volatility - so the one thing that is surely embedded in the VIX is perceptions of forthcoming volatility-though direction is not clear."
"Since volatility is always seen as a risk, it is almost always correlated to market falls - and indeed past evidence supports this hypothesis," Raichura says.
"We looked at all past instances since 2013 where India VIX crossed 20 levels for the first time and what happened in the next 10 days to Nifty - just to see if the impact is substantial, and immediate. The evidence is somewhat mixed - In Fact, 55 per cent of the time, the Nifty actually generated positive returns in the subsequent 10 days! So the near term relationship seems slightly tenuous," Raichura says.
"It doesnt necessarily mean that a VIX of above 20 is necessarily negative in the near term, we also looked at whether the price changes themselves become more erratic. Surprisingly, the 10 day average price change range in the Nifty since 2013 is 2.4 per cent while in the above sample it is 1.94 per cent - lower rather than higher, probably because the Index becomes volatile and range bound at these levels."
