A combination of global and domestic concerns, along with selling pressure from foreign institutional investors, has led to sharp swings in Indian equity markets ? making the benchmark indices the most volatile among emerging markets.
Over the last one month, India VIX ? a measure of traders? expectations of volatility in the near-term based on Nifty index options ? has witnessed a jumped over 1,200 bps from 16.72% to 29.42%.
In contrast, the CBOE VIX, a volatility index on S&P 500 options prices rose just 160 basis points while volatility index based on iShare ETFs on MSCI emerging market index has seen a 200-basis-point increase.
On Tuesday, India VIX closed at its highest since December 2011.
Market experts say volatility has increased in the recent past due to the sharp fall in the rupee and is affecting market participation. As a result of the intense volatility, traders are getting whipsawed on their trading positions, both on the long and short sides.
?For the market to be broad-based, you need better investor confidence, lower volatility and more certainty on factors like policy and growth. Today, there are a lot of unknowns staring from the currency to where the economy is headed and what the future policy framework is going to be,? said the head of trading operations at one of the foreign brokerages.
On Tuesday, the Indian currency closed at a new historical low of 66.19/$. Due to a more than 16% year-to-date fall in its value, the rupee has turned the worst performing currency in 2013, followed by Brazil’s Real (-15%) and Indonesian Rupiah (-14%).
The sharp fall in the Rupee and recent interventions to curb the fall, have led to sharper swings in Indian benchmark indices compared to other emerging market peers, say trader.
For example, in August so far, the average daily trading range of the 30-share Sensex in terms of the difference between daily high and low values, has expanded to 395 points compared to 214 points in July. This trading range equals nearly 2.1% of the average closing value of the Sensex.
On the other hand, other emerging market indices, including Korea’s Kospi, Taiwan’s Taiex and Thailand’s SET, have seen a contraction in the average trading breadth that stood at 1% to 1.7% of their average closing price in the month.
Although total FII outflows from Indian equities in August at $788 million was much lower than net exits of $1.1 billion and $2 billion from Thailand and Taiwan, respectively, the relative performance of the rupee compared to the currencies linked to these countries remained dismal. Thai Bhat and Taiwan Dollar have lost lost 3% and 0.3% of their values in August so far.