India VIX rose 30% since Budget; should investors turn cautious?

History suggests that India VIX and equity markets move in the opposite direction, and the bouts of volatility is likely to continue as long as the index is trading above 13 levels, suggest experts.

Volitality index, India VIX, which measures market's expectation of near-term volatility, rose more than 30 percent in just 2 months.

The index rose from 13.06 on July 5 the Budget Day to 17.27 levels on September 5, a 32 percent rise, data shows.

Consequently, the Nifty50 has fallen by over 8 percent in the same period. The index dropped from 11,811 recorded on July 5, to 10,847 on September 5 which translates into a fall of over 8 percent.

History suggests that India VIX and equity markets move in opposite directions, and the bouts of volatility is likely to continue as long as the index is trading above 13 level, suggest experts.

“Although India VIX rose sharply but fall in August month was less than 1 percent mainly because VIX is not moving in line with the market movement and nowadays more activities are being witnessed in weekly options contracts,” Chandan Taparia, Associate Vice President, Analyst-Derivatives at Motilal Oswal Financial Services told Moneycontrol.

“Since India VIX is trading above 16 zones so volatile swings likely to continue in September series with limited upside while VIX needs to cool off below 13 zones which could provide short term stability in the market,” he said.

Historically, Nifty and India VIX have inverse correlation and India VIX needs to close below 13 zones to witness stability in the market, but experts also say that it is not a perfect correlation. Other factors which could influence markets include movement in USD/INR, crude prices, Gold and Silver price fluctuations and interest rate.

The rise in India VIX is due to a rising consensus in the market participants about the bleak economic conditions, and weak global cues with respect to escalating tensions of a trade war between two biggest economies - the US and China.

In the last one month, we saw spikes in India VIX reading as, 17.78 on August 13, 17.85 on 22 August and 18.06 on September 3 which was triggered by a sharp fall in Nifty on these dates.

“The correlation between India VIX and Nifty has been negative in general but it is not a perfect correlation so the 30 percent rise in India VIX is not reflected in a similar fall in Nifty,” Romesh Tiwari, Head of Research, CapitalAim told Moneycontrol.

Source : https://www.moneycontrol. com/news/business/markets/india-vix-rose-30-since-budget-should-investors-turn-cautious-4410571.html

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