Fall less, rise more: Indian markets less volatile than other emerging markets

A low beta market signifies a stock market that exhibits lower volatility compared to the broader market.

Indian markets can’t stay immune to global financial turmoil, but be it foreign or domestic factors they are a lot more resilient compared to other emerging markets, a comparison of volatility indicators across markets shows.

On August 5, Indian markets were significantly impacted by a global sell-off. However, while Japan’s Nikkei 225 plunged 13 percent and South Korea's Kospi tanked 5 percent, India’s Nifty only tumbled around 3 percent amid US recession fears and fears of unwinding of Yen-Carry trade.

Despite being an emerging market, Indian markets show lower beta and volatility. This is a marked change from previous market cycles. A comparison of the historical beta of Nifty vs. MSCI Emerging Markets shows that back in 2009, Nifty had a beta of 0.45, while the MSCI EM market had a beta of 0.55. Now, in 2024, Nifty’s beta stands as low as 0.09 compared to 0.22 for MSCI EM.

A low beta market signifies a stock market that exhibits lower volatility compared to the broader market. “India used to be influenced by what foreign institutions were thinking. Now the domestic markets are exhibiting low beta,” said Nandik Mallik, CIO of Avendus Capital Public Markets Alternate Strategies LLP. “Yesterday, when markets were crashing, domestic institutional investor (DII) buying was fairly high. This is one reason we have become low beta. Additionally, the ownership of equities is still low in India. The market cap of listed entities vs. GDP ratio is still lower compared to other emerging market countries.”

Mallik believes another reason for this shift is that the options or derivatives market has become fairly deep, leading to better price discovery, lower premiums, and controlled volatility. When asked about the decoupling from global markets over the years, Mallik explained, “The volatility now is nothing compared to what it was 10 years ago. Previously, markets used to have large fluctuations. Now, even when a large global market is down 10 percent, we don’t see Indian markets down even half as much.”

“Comfort in mutual funds and the rise in SIP volumes are the fundamental changes that have made our markets less volatile. But there are other equally strong factors contributing to this,” said Rajesh Palviya, Head of Derivative Research at Axis Securities.

Experts concur that there are several additional factors apart from the steady domestic flows. This includes the diversity in terms of sectors and stocks available, which keeps money moving from one pocket to another, a domestically driven growth story that is less vulnerable to global growth slippages, and an investment-driven economic upcycle. Most importantly, they say, the robust margining system and regulatory framework have also systematically reduced risk in markets.

Palviya further highlighted the fact that foreign institutional investors (FII) investments are now a less dominant force in our markets is also a positive. “In the last couple of years, we have seen significant FII investment in different markets. But in India’s case, their dominance is now lower, making it less prone to global volatility.”

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