Global crisis, tightening domestic liquidity create uncertainty in equity markets.
Fear in markets, both global and domestic, seems to be on the rise. One clear indicator of this is the rising volatility index, or VIX. The index, first created in 1993 by the Chicago Board of Exchange, or CBOE, is an interpretation of an expected volatility in the market for the next 30 days.
This forward-looking indicator is calculated from both calls and puts in the market place, and is also known as the fear index. And, this fear index has been rising in India as well. Analysts describe the market as jittery when the index crosses the 30-point level. The India VIX of the National Stock Exchange has crossed this barrier.
Even globally, the CBOE VIX broke the crucial 45-point barrier on Monday. It was during critical events like 9/11, the height of the dotcom crash and the Long-Term Capital Management (LTCM) crisis that the fear index had risen above 45. While, technically, there is no correlation between the CBOE and India Vix, they tend to move in a similar direction, according to experts.
India does seem to be on a safer ground amid the euro zone crisis. However, the huge pullout of overseas investors (who have withdrawn around Rs 8,480 crore in the past month) is timed with a short-term tightening of liquidity. Also, experts see money market yields rising to over eight per cent, though they remain flat at 7.5 per cent for now.
In addition, credit default swaps – which indicate credit risk perceptions for top-rated Indian companies – have risen to a three-month high of 300 basis points. Mutual funds, sensing uncertain times, have increased their exposure to cash holdings to over 10 per cent from four per cent levels a couple of months ago.
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In fact, these funds have net sold equities to the tune of Rs 498 crore in May. Promoters resorting to pledging their shares also shot up in the last quarter of FY10. Only insurance companies seem to be supporting the secondary market.
These are clear indicators of a tense sentiment and uncertain times — both of which breed fear. And this is expected to prevail till the time some clarity emerges. Till then, the market roller-coaster is bound to have dizzying rides.