Wambai : Investors’ nervousness in Indian equities is waning as India gradually rips off the shackles of the second wave of the COVID-19 pandemic. Investors seem to point to lower risk perceptions, with widespread optimism about lowering daily cases of illness, phasing out businesses and increasing vaccinations.
India’s Volatility Index (VIX), or so-called fear index, has been steadily declining this month. So far in 2021, the index has dropped 29% to 15, falling more than 11% in June alone. In April, it increased by 11.5% on 23.02.
Typically, the volatility index is inversely correlated with the benchmark Sensex and Nifty indices, which hit record highs this month. VIX is investor perception of market volatility in the short term. A low reading indicates that investors do not expect any major correction, at least for the next month. In 2020, as businesses remained closed for most of the year, India’s VIX rose 81% to 21.09.
Siddhartha Khemka, head of retail research, brokerage and distribution at Motilal Oswal Financial Services Ltd, said the low VIX suggests that participants do not see any negative in the market. “The VIX and the market are negatively correlated, and falling volatility suggests that the market base is shifting upward. The low VIX definitely shows that investor anxiety and nervousness have dropped sharply from last year’s highs and even as a result of recent events such as the second wave of the pandemic, which is almost over. “
“There is hardly any major event that could hit the market in the near future, and this is the reason that investors, especially position traders, are completely relaxed,” said Shrikant Chouhan, executive vice president of technical research in stocks, Kotak Securities.
The forecast for a good rainy season, along with other positive factors, is boosting investor confidence in the Indian markets.
However, a sharp rally in equity markets carries risks, and a low VIX indicates that investors are ignoring these risks. “The sharp decline in the volatility index indicates a significant decrease in the level of risk and risk perception by investors. Thus, since most investors are not afraid of equity capital, this is, in fact, leading to a chase for liquidity, which raises concerns about a possible bubble in equity, ”said Binod Modi, head of strategy at Reliance Securities.
The recovery in the market is solely due to the improved visibility of earnings recovery, Modi said, and thus valuations are expected to remain high. “In addition, the lower-than-average spread between G-sec and corporate earnings also contributes to capital growth over other asset classes. Investors should adhere to the basic principles of equity investment and should not get carried away by a low VIX, ”Modi said.
The market also consoled itself with assurances from the Reserve Bank of India to maintain liquidity in the system and the government’s decision to provide free vaccines for everyone and food for the poor. However, economists are worried about the fiscal burden. “According to our estimates, the associated budgetary costs amount to 0.4% of gross domestic product (GDP) and may pose risks for assessing the Center’s financial deficit for fiscal year 22 at 6.8% of GDP,” said Tanvi Gupta Jain. Economist at UBS Securities India Pvt. … Ltd.
While India’s VIX cooled off, it did not even make it to its all-time low of 8.74 on May 21, 2008. The Indian VIX closed at 15 points, up 1.69% on Thursday.
At current levels, the index is about 72% below its all-time low.
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