Mumbai: Traders are finding it difficult to take fresh positions on the derivaties market as brokerages have started refusing part-payments for derivative trade, fearing further increase in margins that have already moved up from 25% to 40-80% in past one week because of rising volatility. This, according to analysts, is turning the market illiquid and vulnerable to steep falls.
Sensex, India’s benchmark equity index, on Monday extended its volatile behaviour, dropping 918 points, or 5%, mid-morning in sync with global markets. But it recovered to close at 18,152.78, still down 208.88 points or 1.14%, even as other key Asian markets remained in the red. At the National Stock Exchange, the 50-stock Nifty index ended at 5274.10, down 109.25 points, or 2%. The recovery was aided by domestic institutions which net-purchased Rs597 crore worth of shares even as foreign institutions net sold Rs1,038 crore in the cash market.
The margins on index and stock futures are based on ‘value at risk’, computed by bourses on a daily basis, with volatility as a core factor.
“With the index (Sensex) moving 1,000 points up or down each day, we are witnessing volatility is at its peak,” said Sailav Kaji, head of derivatives at local brokerage Pioneer Investcorp Ltd. “Traders are not taking fresh positions as brokers have started demanding 100% payment.”
Hong Kong and Shanghai Banking Corporation Ltd (HSBC), in its latest India strategy report, said volatility has increased sharply in line with global markets. The correlation of the volatiltiy between the US and Indian markets is high even though returns from the two markets are not correlated, it said. The correlation of daily returns over a decade has averaged 0.06, while that of volatility in Sensex and the VIX index (measure of the implied volatility of S&P 500 index options, also known as the fear index) has averaged 0.23, it added.
Asian markets on Monday took direct cues from the US, where markets dropped on Friday. The worst hit was the Chinese index, down over 7%. While Hong Kong’s Hang Seng dropped 5.7%, Singapore’s main index fell 4.5% and that of South Korea more than 3.8%. Japanese index lost 4%.
The lack of enthusiasm of futures and options traders was evident from the dropping volumes of Nifty futures, from Rs29,154 crore on 21 January to Rs12,063 crore on Monday.
“Lower volume and consistent shedding of open interest suggest weak participation from investors and less strength in the relief rally,” said Mumbai-based brokerage firm Asit C. Mehta Investment Intermediates Ltd in its weekly Nifty index outlook that predicts possibility of further fall after a minor pull-back rally.
According to analysts, the US Federal Reserve’s policy meet on 30 January and Indian central bank’s quarterly review of monetary policy on Tuesday will decide the course of the markets this week. “The Fed could continue cutting rates by at least another 25 basis points,” notes Lehman Brothers, while HSBC analysts are making a similar bet on Indian policymakers. However, Goldman Sachs’ Asia economist, Tushar Poddar, in a Monday note, said: “We expect the Reserve Bank of India to keep rates unchanged, and yet signal a change in course to more neutral in its statement.”