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India fear gauge eases, but market players have more than one concern

India’s VIX has fallen nearly 41 per cent from the multi-month highs hit earlier this month.

, ET Bureau|
Updated: Feb 26, 2018, 08.28 AM IST
Money managers believe that the period of low volatility seen in the market last year is over.
Mumbai: Traders’ expectations of near-term risks have ebbed of late after hitting a two-year high earlier this month, but money managers said this may be a lull before the storm. Political uncertainty ahead of the slew of state elections, risk of MSCI cutting India weightage, foreign fund selling and hardening of bond yields will keep investors on the edge in the coming months, making the recent fall in volatility temporary.

India’s VIX has fallen nearly 41 per cent from the multi-month highs hit earlier this month. As bond yields in the US came off their multiyear highs, Indian markets gained 1 per cent on Friday — the most in a month, leading to India VIX declining 4.25 per cent to 14.20.

VIX snip

However, money managers said that the VIX-which measures market’s perception of volatility in the near term, may have plateaued for now but this cool-off may not last. This only suggests that the pace of selling in the market may get lower “Although volatility as measured by VIX has come off sharply from high levels seen few days ago, at 14, it is still showing that there is some risk aversion in the system. The confidence in the market is not entirely back and my guess is the days of low and stable vols are not going to be back,” said Ritesh Jain, chief investment officer at BNP Paribas Mutual Fund.

Indices are down 5 per cent so far in February with a combination of domestic and global factors putting brakes on the record-setting rally that had been going on almost uninterrupted for more than a year. Besides rising US bond yields, concerns over rising inflation in India, the Rs 11,400-crore fraud at Punjab National Bank and introduction of the long-term capital gains tax on equity had spoiled market sentiment. This led to foreign investors going on a selling spree by offloading shares worth Rs 10,000 crore in the current month.

With Friday’s decline, the India VIX is down 40.9 per cent from the peak of 24.03 hit earlier this month. The VIX had spiked to 24 zone — the highest since February 23, 2016 — with the global market sell-off as a result of the rising bond yields in the US-took a toll on the Indian market as well.

“Volatility levels will actually increase going forward. This might be the lull before the storm,” said Nilesh Shah, managing director of Kotak Mahindra Asset Management Company.

Shah said that volatility could increase because of heightened uncertainty regarding the political situation in the country with elections due in states of Karnataka, Rajasthan, Madhya Pradesh and Chhattisgarh over the next few months and the general elections which are due mid next year.

“There could be potential event-related volatility like MSCI index change. MSCI has said it may reduce India weightage. Thirdly, flows may be impacted because of political uncertainty and potential events related uncertainty,” said Shah.

Money managers believe that the period of low volatility seen in the market last year is over.

“For the near term, volatility may have peaked but this year volatility is likely to be higher than last year,” said Gopal Agrawal, chief investment officer at Tata Mutual Fund.

Volatility may increase also because earnings may be volatile due to recognition of non-performing loans in banks, said Agrawal.

The biggest reason, which may lead to higher volatility, is that the low interest rate environment is changing, said Gautam Chhaochharia, head of India research at UBS. For years since the financial market crisis in 2008, emerging markets, including India, have enjoyed what has come to be known as ‘easy money’, as the central banks in developed countries embarked on quantitative easing programmes to shore up their economies.

“The cheaper liquidity had led to complacency building up. Volatility will not go back to low levels like we saw last year,” said Chhaochharia.

India VIX had moved between a low of 8.76 and a high of 18.76 in 2017.

“VIX will not go below 12-12.5. It is likely to stay in a range of 12 to 16,” said Chandan Taparia, derivative analyst at Motilal Oswal.
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