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Rise in India VIX not alarming; FIIs play it cool ahead of poll outcome & Fed meet

Ahead of key events, the market is usually in a positive consolidation mode. India VIX continues to be subdued, said Amit Gupta of ICICI Securities.

, ETMarkets.com|
Last Updated: Mar 09, 2017, 03.19 PM IST
NEW DELHI: The India volatility index (VIX), a gauge of the market’s short-term expectation of volatility, rose nearly 10 per cent in just four trading sessions ahead of two key events scheduled for March – state election results and the US Federal Reserve’s policy review starting March 14.

The volatility index saw a surge of nearly 4 per cent to quote at 14.68 at the time of writing of this article on Thursday. However, analysts are not alarmed by the sudden rise in the VIX.

The volatility index is a measure of the market’s expectation of volatility over the near term. Usually, in periods of market volatility, the market moves up or down steeply and the volatility index tends to rise.

“Ahead of key events, the market is usually in a positive consolidation mode. The volatility index (India VIX) continues to be subdued and it suggests that the market is not bracing for a sharp decline post these events,” Amit Gupta, Head of Derivative at ICICI Securities, told ETMarkets.com.

“Broadly, there is a belief that the party at the Centre is likely to do well in the UP elections and a likely rate hike by the US Fed is not likely to trigger any sharp profit booking. A rate hike by the US Fed is now perceived by the market as an indication of strong future growth,” he said.

History suggests the volatility index declines as soon as volatility subsides. The volatility index is different from price index such as the Nifty50 and shares a negative correlation.

At high levels, the India VIX implies the market’s expectation of large movement in the Nifty50 and vice versa. Usually, whenever the India VIX has risen, the market has fallen.

“From the point of India VIX, it seems volatility is already being discounted in the system. The VIX, which is currently trading at 14.63, is trading near its lows. In all likelihood, geopolitical triggers would prove to be a non-event,” Pushkaraj Kanitakar, AVP for Technical Research at GEPL Capital, told ETMarkets.com.

“However, investors should watch out, in case it rises above 15-15.6 where a cluster of moving averages is placed. In case it breaches this level on the upside, the market direction could change,” he said.

FIIs playing cool ahead of key events
Foreign institutional investors (FIIs) have turned net buyers from being net sellers in the domestic equity market, which is a good sign. Even though a March rate hike by the US Federal Reserve looks eminent, FIIs are still holding on to their long positions.

Data suggests foreign institutional investors (FIIs) have not started shorting this market or started hedging aggressively. FII cash figures for March series suggest over Rs 4,000 crore worth of purchases in equity and over Rs 1,000 crore in debt.

“Equity buying of over Rs 4,000 crore has a lot of FII stock blocks. If one excludes that and looks at regular buying data, it suggests FIIs’ positive stance is not pronounced. However, if we look at the FII net index future data, they look more positive as their net long index future positions have reached a multi-month high,” said Gupta of ICICI Securities.

“From this, one can infer that FIIs are still positive for the short term and are playing the upsides via derivatives segment and they haven't bought much in the equity segment in the over 12 per cent rally,” he said.

Looking at the current F&O setup, the market seems to be positioned for newer highs and intermediate decline, if any, should be used as a buying opportunity, said experts.

Most analysts do not anticipate major volatility due to FII outflows in the near term, but a correction or consolidation could happen after fourth quarter earnings after the sharp runup seen in recent times.

“Investors can look at option strategies to hedge their portfolios by buying Put options, although these need to be adjusted to the current beta and composition of a portfolio,” Ankit Agarwal, Fund Manager, Centrum Broking, told ETMarkets.com.

"For long-term investors, any near-term fall in the market should be looked at as a buying opportunity to invest in the market," he said.

Gupta of ICICI Securities advised investors to look at going long on declines towards 8,800. “Simultaneously, post the event one can look at selling Call and Put options as the delta move may end post event and the market may resume its positive consolidation,” he said.

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