Mumbai: Markets are bracing for turbulence in the days to come, an index of investors’ apprehensions showed, as uncertainty over election outcome and rising crude oil prices loom over the economy.
The National Stock Exchange’s (NSE’s) India VIX index, which tracks investors’ perceptions of volatility for at least a month ahead, has soared 54% in the year so far. On Tuesday, the index stood at 24.60, the highest in three years.
India VIX, which fell 5.98% in March, has risen 43.4% in April. So far this year, NSE’s 50-share Nifty index has gained over 9%. On Tuesday, the Nifty closed at 11,575.95, points, down 0.16%.
In 2018, India VIX had climbed 26.3% while the Nifty rose 3.15%. In 2017, VIX slipped 18.1% and Nifty gained 28.7%. The last full year in which India VIX soared higher was in 2011, when it surged over 60%. The volatility index typically has an inverse correlation with the markets. The index at elevated levels indicates investors expect a major correction at least over the next month.
According to Nagaraj Shetti, senior technical and derivative analyst at HDFC Securities Ltd, the rising VIX points to rising volatility, and there could be further downside to the markets from current levels.
“Rise in VIX is a reaction to the Nifty touching a record high last week. One can expect further corrections in the markets as VIX indicates," he said.
On 18 April, Nifty had touched a life-time high of 11,856.15, before closing the day at 11,752.80 points.
To be sure, VIX rises at the time of national elections due to uncertainty about the new government and its policies. In April 2009, VIX had risen 16.2% after a fall of 2.76% in March. Similarly in 2014, both in March and April, VIX had increased 52.51% and 41.48%, respectively.
However, Chandan Taparia, derivative and technical analyst at Motilal Oswal Securities Ltd, said even though markets and VIX have a negative correlation by around 80%, the index need not necessarily decline, since volumes are increasing.
“Higher VIX is due to the expectation of a volatile swing on either side in the market. Increase in volatility is because of election results which is scheduled in second last week of May. It suggests that option writers are charging more premium and the index is expecting a volatile swing of 600-700 points on either side," Taparia added.
Sahaj Agrawal, vice-president, derivatives with Kotak Securities, said, “I expect VIX to stay elevated until the elections’ outcome. Currently, markets are in a corrective phase and see trend to continue for two-three weeks. There is long unwinding in the markets because of geopolitical tensions which have taken oil prices higher. Considering the risks, the markets may correct further."
A surge in crude oil prices sent Indian markets to their steepest drop this year on Monday as investors rushed to sell shares, fearing that rising oil prices will stoke inflation and lead to fiscal slippages. An increase in oil prices is likely to put pressure on India’s fiscal and current account, and comes against the backdrop of the 2019 Lok Sabha elections.
Crude oil prices have surged over 35% this year so far.
According to economists, if crude oil prices remain around $75 per barrel for another month, the Reserve Bank of India may postpone a rate cut in June.