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Home / Market / Mark-to-market /  Indian markets are far more volatile than others

Indian equity markets display greater volatility compared with many other emerging markets, even China. At 3.23, the ratio of stock market volatility to earnings volatility is about three times the average for most emerging markets, a report by Morgan Stanley shows. Markets in China, Brazil and Russia, too, show much lower volatility. And volatility in Indian markets is almost five times the average volatility of developed markets.

The higher volatility is due to increasing ratio of foreign equity inflows to domestic equity savings. This has exposed Indian markets to global capital market cycles. A classic example was the recent crash in Indian markets when negative sentiment led by a falling rupee and an improving US economy triggered selling.

Perhaps the volatility would be lower if domestic equity savings were also rising in tandem with global flows. On the contrary, domestic risk capital formation has been low. The Reserve Bank of India’s Handbook of Statistics (September 2013) shows that investment in shares and debentures constituted barely 3.1% of the incremental financial assets of the household sector in fiscal year 2013. This yardstick is down from 6.6% and 9.6% in fiscal years 2007 and 2008, respectively.

Retail investor participation in the equity market is very low. Bank deposits account for about 54% of the household financial savings, indicating the low appetite for risk assets. And that’s not taking into account the fact that the bulk of household savings are in physical assets.

In fact, the ratio of foreign to domestic risk capital (equity inflows mainly) has steadily risen from 0.5 times even around a decade back to about 20 times at present. The decline in domestic equity savings since the 1990s, according to the Morgan Stanley report, is one of India’s biggest structural problems.

What then is the solution? One absolutely necessary measure would be to lower inflation so that real returns from financial savings increase. But that would not be sufficient; getting back to high growth rates is also needed.

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