The market has been very placid for two months now. Low volatility period is always followed by a period of high volatility. So, fasten your seatbelts against some major surprises
India VIX, a volatility index based on the index option prices of Nifty index has collapsed to its lowest level since March 2009, from when the data is available. Market players are assuming that volatility will remain low and the market will continue to be range-bound but the current low volatility may only presage a big surprise (positive or negative) in the coming weeks.
The daily VIX hit its lowest close of 17 on 9th August in these 17 months. The index was around 25-30 on most days in the first two months of the year. The 50-share Nifty had hit 5,367 on 21st June and has moved in a narrow trading range since then. It fell to 5,225 on 2nd July and rose to 5,492 on 9th August and is at around 5,400 at the time of writing this piece. This has been an extremely tight trading band for an extended period of time. As a result VIX, the measure of volatility, is sharply down. How should we interpret this, since low volatility period is invariably followed by a high volatility period?
"Low volatility can have two meanings. One is that the market is becoming very complacent and to that extent people are not expecting wild swings on either side. Therefore, volatility is reducing. People are not taking the market risk into account. The second reason could be that we are in the middle of a new long bull market. Typically, when a long bull market starts, the volatility subsides and remains low for a prolonged period of time. This is what has happened in two bull markets. We could be entering that phase now. As that happens, we could see steady upward move in the market intertwined by corrective phases, like what happened in May 2004, 2006 and 2007," said Sandip Sabharwal, CEO - Portfolio Management Services, Prabhudas Lilladher Pvt Ltd. If Mr Sabharwal is right, the low volatility will be resolved by extreme downside volatility as happened in May-June 2006, before the market resumes its upward journey.
"The market is at an indecisive phase and therefore it is in a narrow range with low volatility. If the market starts correcting you will see more volatility. The market is waiting for some correction," said a Mumbai-based head of an institutional equity firm.
The highest daily VIX was on 19 May 2009 (it hit 56.07), following the decisive victory of the Congress party in the 2009 elections. VIX then slipped to its lowest level on 9 August 2010 to 17. "Lower volatility is associated with stability. The markets are not expecting any huge moves and generally huge moves are associated with falls and not the increments. The volatility aspect is very closely watched but you don't know how low is low," said a Mumbai-based analyst. Jintendra Panda, senior vice president & business associate, Motilal Oswal Financial Services Ltd observes that volatility will remain low in the near-term. "Over the last 6-8 months, the market has consolidated within a small range after an upturn in 2009. The volatility is expected to remain low for the next one or two quarters."
Indian markets, like all emerging markets, are supposed to be more volatile than US markets. But the Indian market has been so placid that it is less volatile than the broad market index, S&P 500 whose volatility index now is around 22 now. On 24 October 2008, fears of a financial meltdown sent the VIX to a historic high of 89.53.
While traders are unhappy that volatility has collapsed and that there are lot of tiny whipsaws now which are inflicting losses, Deena Mehta, MD of Asit C Mehta Investment Intermediates Ltd says that low volatility is good for long-term investors who should not take cues from short-term volatile movements.
"It's good for investors as they will not be in for shocks and surprises. Too high volatility is not considered to be good. Low volatility is good for people who have a long-term view on the market. If you have a long-term view then you are not bothered about short-term shocks. People who have a short-term view of 15-30 days are not happy with low volatility as there are fewer opportunities to enter and exit in the market."
Chennai: The Prime Minister's economic think tank today said autonomy of the regulators should not be affected by the mechanism to resolve disputes between watchdogs, a comment that comes in the wake of the Reserve Bank of India's (RBI) apprehensions over the loss of freedom under such a set up proposed by the finance ministry, reports PTI.
"We need to find an effective mechanism to resolve if dispute arises between regulators. I think every care should be taken to ensure that the autonomy is no way affected", said C Rangarajan, chairman of the PM's Economic Advisory Council (PMEAC).
On turf war between market regulator Securities and Exchange Board of India (SEBI) and insurance watchdog Insurance Regulatory and Development Authority (IRDA), he suggested an effective mechanism for resolving 'disputes' between market regulators.
SEBI and IRDA were engaged in a public spat over regulation of Unit Linked Insurance Products (ULIPs), with both coming out with contradictory orders.
Later, the government gave the regulation of ULIPs to IRDA through an ordinance that also provided for a joint mechanism between the finance ministry and financial regulators to sort out disputes over hybrid products.
However, RBI had expressed reservations that the ordinance may curtail the autonomy of regulators as disputes are currently handled by high level coordination committee headed by the central bank, while the proposed authority was to be chaired by the finance minister.
While tabling the bill, which was later passed by the Lok Sabha to replace the ordinance, finance minister Pranab Mukherjee allayed fears of RBI that regulators' autonomy will encroached through the joint mechanism.
"It was true there were lots of apprehensions whether we are going to dilute the regulators' independence or autonomy.
It will only be in the case of jurisdiction disputes between the regulators that the joint mechanism will be used," Mr Mukherjee had said.
Mr Mukherjee further assured that the joint mechanism will not deal with other areas and only the regulators can refer the matter of jurisdiction to the committee.
The bill also elevated the position of the RBI governor to vice-chairman in the joint body, whereas the ordinance made him just a member along with other financial sector regulators.
Earlier, addressing the conference Mr Rangarajan called for initiatives that would bring significant surge on the micro-finance sector.
He said as the Committee on Financial Inclusion had recommended, there was a need to recognise a separate category for "micro-finance-non-banking finance companies (MF-NBFCs)".
"This should be done without any relaxation on the start up capital. They should also be subject to all the regulatory prescriptions as applicable to NBFCs," he said.
New Delhi: The government is considering putting up a fertiliser plant in the gas-rich Gulf region to bridge the demand-supply gap, reports PTI.
"Various proposals are under consideration in the Middle East for exploring the possibility of putting up an ammonia-urea fertiliser plant in countries like Oman, Saudi Arabia, Qatar and Kuwait", minister of state for chemicals and fertilisers Srikant Kumar Jena said in a written reply to the Rajya Sabha.
A fertiliser-deficit nation, India generally imports one-third of its total fertiliser requirement for a year. It will have to import more than 11.6 million tonnes of fertiliser to meet its domestic demand for the current kharif season, ending September, which includes 30 lakh tonnes of urea. Domestic urea production caters only 70% of the total requirement.
India had produced 21.1 million tonnes urea, 4.2 million tonnes DAP and 8 lakh tonnes complex fertilisers in 2009-10.
"The government is continuously following-up the issue of availability of gas with the competent authorities in the respective nations", Mr Jena said.
The minister, however, added that so far no country in the Gulf region has given confirmation about supply of gas at affordable price.
Failed to attract the desired investment in the sector, the government had announced New Investment Policy, 2008.
Following that, investments worth Rs24,000 crore were committed by six fertiliser firms, but could not be carried forward as the units were seeking firm gas allocation at a pre-determined price or insulation from additional liability due to price rise.