After steadily moving up without volatility over the past year, a combination of global developments and local policy elements brought volatility back to centre-stage, analysts said.
While the Nifty has corrected by 5 per cent, the CNX Mid-cap index is down 11 per cent from its highs. And India VIX, the fear gauge, has gone up 27 per cent since Jan 31 this year. VIX is a key measure of market expectations of near-term volatility conveyed by the Nifty index option prices.
Nifty and India VIX are strongly correlated with a negative correlation of 0.74. As VIX index increases, market corrects. In fact, in the past a sharp surge in VIX was accompanied by an underlying correction. The strong negative correlation also suggests the same. Markets are expected to consolidate in the next few trading sessions, said Anita Gandhi of Arihant Capital Markets.
The journey of the Indian equity markets in CY17 was an ideal one – consistent upmove without volatility. The Nifty returned 29 per cent in CY17 without a single drawdown of even 5 per cent. What makes this more noteworthy is that this happened in a year characterised by significant and disruptive reforms like GST, insolvency and bankruptcy court resolution for NPAs, and Rera.
‘’We reiterate that traders need to be very selective as the volatility is likely to remain on the higher side and also with such global issues,” said Sameet Chavan of Angel Broking.