Volatility index jumps to near 12-month high

The recent panic in the currency and debt market in India seems to be slowly spreading on to the equity markets as investors become wary of the possible foreign institutional investor (FII) outflows in coming days if rupee weakens further.

The benchmark index Nifty on Tuesday tanked 1.52% or 89.2 points to close at 5788.80 on concerns that rupee depreciation may make current account deficit situation worse and prevent the Reserve Bank of India (RBI) from cutting interest rates in June policy meet.
The rupee on Tuesday touched its new all-time intraday low of 58.985 before closing at 58.395.

The India VIX, a volatility index based on the Nifty Index option prices, which indicates the expected market volatility over next 30 calendar days, on Tuesday climbed 7.62% to close at its almost 11-and-a-half month high of 19.49%.

This is the highest close for the fear gauge since June 28, 2012 when it had closed at 20.62%.

Yogesh Radke, head of quantitative research at Edelweiss Securities attributes the sharp movements in VIX over last month or so to the strength in US dollar which is leading to unwinding of carry trades and resultant panic in currency and bond markets.

“The panic has now started to reflect in the equity markets. The market participants are scared of the intensity of rupee depreciation and hence the VIX which is a function of market sentiments has seen sharp jump recently,” he said.

The VIX index has risen by 40% since the start of May.

Radke says that FIIs have nearly unwound most of their long positions in index they had at the start of June series and are creating some amount of shorts as well.

As per provisional exchange data, the foreign institution investors were net sellers of equities worth Rs 886 crore in the cash segment and continued their selling spree in the index futures segment as they net sold futures worth Rs 1,858 crore. FIIs have now net sold Rs 7,425 crore worth of index futures in the last 8 sessions.

The Nifty June futures fell 1.63% to 5797 while the open interest increased by nearly 11.49% indicating creation of shorts.

Vikas Jain, AVP – Retail Research at Religare Securities, is of the view that the volatility would continue to remain high in the coming days till the time currency shows some signs of stability.

However, he expects the markets to bounce back once they fall to 5750 levels.

“The Nifty has now corrected almost 325 points from last expiry close and we may see Nifty taking support at 5750 levels,” he said.

Radke, too, expects some bit of consolidation for the markets around the current levels.