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Business News/ Market / Stock-market-news/  India VIX rises with Nifty as relationship breaks down
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India VIX rises with Nifty as relationship breaks down

The CNX Nifty Index and the India VIX Index's 20-day correlation reached a record 0.53 on 2 Apr, up from a historical average of minus 0.48

The Nifty has increased 8.2% this year, the most among indexes in the four largest emerging markets, as the improving economic growth outlook enticed foreign investors. Photo: Hemant Mishra/MintPremium
The Nifty has increased 8.2% this year, the most among indexes in the four largest emerging markets, as the improving economic growth outlook enticed foreign investors. Photo: Hemant Mishra/Mint

Mumbai: India’s Lok Sabha election is causing a breakdown in the six-year relationship between prices of the nation’s equities and options.

While the CNX Nifty Index and the India VIX index have almost always traded in opposite directions since Bloomberg began compiling the data in 2007, they’re now moving together more than ever before. The gauges’ 20-day correlation reached a record 0.53 on 2 April, up from a historical average of minus 0.48, as prices for both stocks and options increased.

Traders are paying up to protect against swings before the 16 May election results. Polls show the opposition Bharatiya Janata Party (BJP) will win a majority in a government whose mandate is to revive economic growth. The Nifty moved an average 14% in the two days following the results of the last three elections, as the outcomes defied polls’ predictions.

“The Nifty is setting up for a big move no matter who wins the elections," Manoj Vayalar, a Mumbai-based assistant vice-president at Religare Securities Ltd., said by phone on 12 April. “Traders are anticipating a wild swing."

The Nifty has increased 8.2% this year, the most among indexes in the four largest emerging markets, as the improving economic growth outlook enticed foreign investors. The 50-stock measure rose to a record 6,817.65 at the close on Monday, with overseas funds buying $4.7 billion of shares in 2014, the most in Asia after Taiwan, data compiled by Bloomberg show.

Protection Demand

Investors are betting that an administration led by the BJP’s prime ministerial candidate Narendra Modi will be able to fast-track projects in a country ranked bottom among the four largest emerging markets in the World Bank’s 2013 Ease of Doing Business Index. The economy expanded 4.9% in the year ended 31 March, up from the decade-low growth of 4.5% in the previous 12 months, the ministry of statistics and programme implementation estimates.

The BJP and its allies may win 275 of 543 parliamentary seats up for grabs, three more than they need for a majority, according to a Hansa Research survey for the NDTV channel released on 14 April.

Demand for protection against swings in shares is rising as some investors weigh prospects for an election outcome going against predictions. The India VIX, which measures the cost of Nifty options, surged 11.5% to 34.38, the highest level since 5 October 2011. The gauge rose 5.7% to 30.85 last week for a fourth weekly increase.

Poor Record

Pollsters have had a poor record forecasting election outcomes in the world’s largest democracy. The ruling Congress party won in 2004, even after surveys predicted the BJP would keep power. In 2009, after polls forecast a close fight, Congress emerged with the largest tally in two decades, lifting the benchmark S&P BSE Sensex Index by a record 17%.

“The recent increase in correlation between the Nifty and the India VIX is poised to reverse after the vote," according to Ashish Chaturmohta, head of technical and derivatives research at Fortune Equity Brokers Ltd. in Mumbai. “The two indexes have moved in opposite directions about 80% of the time in the past two years," he said.

“Most bets are now focused on the elections, and once it’s over, volatility will just collapse," Chaturmohta said. “We expect the inverse relationship to be restored."

Nifty Climbs

The Nifty index, with companies from Infosys Ltd. to HDFC Bank Ltd., trades at 13.9 times projected 12-month earnings, compared with the average multiple of 14.4 in the past five years, data compiled by Bloomberg show.

The increase in the India VIX is partly due to the fact that options expiring in May are assuming greater weight in the measure than April contracts, which are expiring this week, according to Bhavin Desai, a derivatives analyst with Motilal Oswal Financial Services Ltd.

Religare’s Vayalar says the volatility gauge may climb as high as 42 during the election period.

“Volatility will remain elevated till elections," R.K. Gupta, managing director of Taurus Asset Management Co., which manages about $585 million, said by phone from New Delhi on 16 April. “The results can throw a surprise, and no one wants to be caught on the wrong side." Bloomberg

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Published: 21 Apr 2014, 10:40 PM IST
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