Indices point to volatile future

Market sentiment the world over takes a knock

The volatility in the Indian stock markets has touched a new high, indicating a further fall.

Experts expect the market to be in a "corrective mode" till the volatility ends. At present, the implied volatility of Nifty Index of the National Stock Exchange (NSE) is 28 per cent, mirroring the swings in the market.

Both the key benchmark indices "" Bombay Stock Exchange's (BSE's)Sensex and NSE's Nifty "" have seen sharp movements since last Monday (July 30) on worries over the US subprime mortgage market, which led to selling pressure from foreign investors in emerging markets, including India.

Analysts said the implied volatility of 28 per cent is considered high, but much lower than May 2006's 30-34 per cent. The Sensex and Nifty indices wiped off nearly 30 per cent in a matter of weeks in May-June 2006 period.

In Monday's trade itself, the Sensex lost 432 points in the day, before swinging back to recover nearly 200 points to close at 14,903, down 235 points from Friday. The Sensex has lost nearly 1,000 points from its peak in the last couple of weeks (from 15,868.85 to 14,903).

Japan's Nikkei Index is having a volatility of 18.4 per cent at present, which is considered reasonable, compared to 30 per cent in February.

Ravi Sharma, analyst with local brokerage Prabhudhas Leeladhar, said at present, puts are becoming expensive while the calls are cheaper. This indicates a further downside to the market, he said.

Importantly, the high volatility is now not just an Indian phenomenon. Markets across the globe are facing relatively high volatility, courtesy the US subprime mortgage worries. "High volatility is a global phenomenon now," Sharma said.

However, Ajay Shah, senior fellow at the National Institute of Public Finance and Policy, who had made studies on volatility of the Indian markets in the past, said the current implied volatility of 27 per cent is "not much" compared with other markets.

He said several factors including the Indian earnings story, GDP, liquidity in the market impact the volatility. "USsubprime is just one factor (that is impacting the volatility)," Shah said.

Alex Mathew, head of research at Geojit Financial Services, said the current volatility of Indian stocks at 27-28 range was on the higher side. For the Dow Jones Index, the volatility is at 23.42, while for Nasdaq, the volatility is around 25.

The Indian markets had its highest volatility during May 2004 when the implied volatility was hovering around 50-54 per cent.

TENSE FEELING

In Monday's trade itself, the Sensex lost 432 points in the day, before recovering nearly 200 points to close at 14,903, down 235 points from Friday

The Sensex has lost nearly 1,000 points from its peak in the last couple of weeks (from 15,868.85 to 14,903)

The implied volatility of Nifty at 28% is high, but much lower than the May last year's 30-34%