Nervousness among investors in Indian stocks is ebbing as India gradually breaks the shackles of the second wave of the covid-19 pandemic. Investors seem to be indicating lower perception of risks, with widespread optimism around declining daily cases, phased unlocking of businesses, and a pick up in vaccination.
The India volatility index (VIX), or the so-called fear index, has been consistently falling this month. So far in 2021, the index has slipped 29% to 15, falling more than 11% in June alone. In April, it had risen 11.5% 23.02.
Typically, the volatility index has an inverse correlation with the benchmark Sensex and Nifty indices, which have hit record highs this month. VIX is the investors’ perception of the market’s volatility for the near-term. The low number indicates that investors do not expect any major correction at least over the next month. In 2020, as businesses remained closed for most part of the year, India VIX had heated up, rising 81% to 21.09.
Siddhartha Khemka, head, retail research, broking and distribution, Motilal Oswal Financial Services Ltd, said a low VIX suggests that participants do not see any sort of negativity in the market. “The VIX and the market have a negative correlation and falling volatility suggests that the market base is shifting higher. A low VIX definitely shows that investors’ anxiety and nervousness has come down sharply from the highs of last year and even from recent events such as the second wave of pandemic, which has now almost played out.”
“There is hardly any major event that can hit the market in the near term and that’s the reason investors, especially positional traders, are completely relaxed,” said Shrikant Chouhan, executive vice president, equity technical research, Kotak Securities.
The forecast of a good monsoon, along with other positive factors, is adding to investor confidence in Indian markets.
However, the sharp rally in stock markets is not without risk and a low VIX indicates that investors are ignoring those risks. “A sharp contraction in volatility index indicates significant decline of risk level and risk perception among investors. Therefore, as investors mostly tend to be fearless about equity, it essentially leads to more liquidity chasing equity, which raises concerns about a possible bubble in equity,” said Binod Modi, head, strategy, Reliance Securities.
Buoyancy in the market is purely on account of improved visibility of earnings recovery and, therefore, valuations are expected to remain high, according to Modi. “Further, lower than average spread between G-sec yield and corporate earnings yield also favours equity over other asset classes. Investors should stick to basic principles of equity investment and should not get carried away by the low VIX,” Modi said.
The market has also been taking comfort from the Reserve Bank of India’s assurance to keep liquidity intact in the system and the government’s decision to provide free vaccines to all and food to the poor. However, economists are concerned about the fiscal burden. “We estimate that the associated fiscal cost works out to 0.4% of gross domestic product (GDP) and could pose upside risks to the Centre’s FY22 fiscal deficit estimate of 6.8% of GDP,” said Tanvee Gupta Jain, economist, UBS Securities India Pvt. Ltd.
Despite having cooled off, the India VIX is not even within striking distance of its record low of 8.74 seen on 21 May 2008. India VIX closed at 15, up 1.69% on Thursday.
At current levels, the index is around 72% away from its record low.
Never miss a story! Stay connected and informed with Mint.
our App Now!!