Volatility index declines 22% through 5 sessions of market rally

Representative image

The index to measure volatility in stock markets fell sharply in the last five sessions as equities jumped in response to gains in global markets, drop in Covid cases in China and speculation over a potential pause in interest rate hikes by the US Federal Reserve later this year.

The India volatility index (VIX), often referred to as the fear gauge, fell nearly 22 percent in the last five sessions to 20 from 25.63 on 24 May. So far this year, it has surged nearly 24 percent. Since May 24, the benchmark Sensex and Nifty surged 3.3 percent each, while year-to-date decline in the two benchmarks has been 4.2 percent.

Declining volatility suggests that bulls are in comfort and buying on decline could be a strategy, said  Chandan Taparia, Vice President - Equity Derivatives and Technicals, Broking and Distribution at Motilal Oswal Financial Services Ltd.

Global markets began trading higher after China eased Covid restrictions in Shanghai and Bejing and also offered a slew of economic support measures. Investors got some relief after the minutes of the Fed’s early May meeting, released Wednesday, which fuelled speculation over a potential halt in interest rate hikes later this year.

The monsoon arrived earlier than usual in India and also boosted investor sentiment. Analysts said timely and normal rains are set to boost production outlook for monsoon sown crops such as rice, soyabeans and pulses and help in bringing down inflation.

"This means that participants are less unsure and less scared about markets than they were a week back", said Siddarth Bhamre, Head of Research, Religare Broking Ltd.

"Also we have seen the mood in FIIs camp changing as their net index futures long jumped from around 17 percent a week back to 55 percent as of yesterday. Rollovers in BankNifty were less indicating less negativity and shorts in Nifty leaves room for further short covering in near future. Current bounce back has some steam left and the next meaningful congestion zone for nifty is between 17000-17200," Bhamre said.

Investors awaiting India's GDP will be released at 5.30pm today, the US non-payroll data on Friday and RBI monetary policy on 6-8 June. Key domestic auto monthly and PMI numbers also watchful.

"Since 25 May, India's VIX witnessed a substantial decline amidst short covering in the frontline majors. The volatility may increase after a consolidation, as RBI’s monetary policy is scheduled for next week. However further decline in the India VIX will prepare benchmark-Nifty50 for its next leg of up-move," said Jatin Gohil- Technical and Derivative Research Analyst at Reliance Securities.