India volatility index up 23% after downgrade

Global uncertainty has pushed volatility levels across the globe. India is no exception. Ever since Greece’s credit rating downgrade, India VIX, the Volatility Index , has risen more than 23 per cent, after staying in a narrow range for a couple of months. Market participants, however, feel the index is still away from “alarming levels” and will stay in the current range due to a combination of domestic and global factors.

On Thursday, VIX ended the day at 24.36 points, up 2.83 per cent over its previous day close. On April 27, when Standard & Poor's downgraded Greece’s debt to “junk”, India's VIX closed at 19.82. The day after (April 28), VIX rose nearly 15 per cent to close at 22.73 points, reflecting the spurt in uncertainty and panic.

A volatility index, in simple terms, is a measure of the market’s expectation of movement — upside or downside — over the near term. The index signifies the amount by which the underlying basis is expected to fluctuate in the near term. According to the National Stock Exchange (NSE), India VIX is a volatility index based on Nifty option prices. From the best bid-ask prices of Nifty 50 options contracts, a volatility figure (per cent) is calculated, which indicates the expected market volatility over the next 30 calendar days, explains NSE.

Local factors restrained
Market participants who track VIX on a daily basis say while the index is rising on the back of sudden panic created in the market due to global macro-economic factors, it is still within the comfort zone as far as Indian markets are concerned.

“Historically, India VIX has never remained at the abnormally low levels of 14-17 that was the case till some time back,” said TS Harihar, co-head (derivatives), ICICI Securities. “The recent rise has been more because of the sudden crash in the market. I think it is highly unlikely that VIX will cross the alarming levels of around 29 or 30. It will stay in the range of 22 and 25,” said Harihar.

Similarly, Jitendra Panda, senior vice-president, Motilal Oswal Financial Services, says, “The spurt (in VIX) has been quite fast, reflecting the change in the risk perception”.

“There is hardly any stability in the market. Credit is also absent. Add to it the international factors and we see the volatility rising,” says Panda. VIX would sustain at current levels or move up slightly higher, he said.

A rise in volatility assumes significance because it is a key element in pricing options, which have been gaining steady popularity among all investor classed. In some recent months, the turnover in options was much higher than that of futures. Traders generally prefer options when they expect a sharp movement on either side, as the downside for the buyer in an option contract is limited to the premium.

“A rise in VIX impacts various asset classes and traders have to resort to protective measures,” said Panda. “We are indeed seeing a lot of changes in strategies to factor in the increased volatility.”