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Why's volatility index India VIX flashing far less fear than before?

The India VIX index, a gauge of volatility in the stock market, has nosedived more than 33 percent after hitting multi-year highs on February 24.

New Delhi / March 29, 2022 / 09:26 AM IST

The dramatic spike in volatility seen a month ago as Russia’s military advanced into Ukrainian territory appears to be subsiding significantly in recent sessions indicating investor confidence on the mend.

The India VIX index, a gauge of volatility in the stock market, nosedived more than 33 percent after hitting multi-year highs on February 24, the day Russia’s President Vladimir Putin announced a “special military operation” in Ukrainian territory.

The decline in the domestic volatility index has been in line with the more actively tracked CBOE VIX index, a marker of uncertainty in US equities. The CBOE VIX index collapsed below the psychologically crucial 20 point mark on March 28, taking its overall losses from the recent high to close to 50 percent.

“Market is attaching less risk to the whole Russia-Ukraine situation and the decline in the index shows that bargain buying is emerging in equities,” said Shrikant Chouhan, executive vice president at Kotak Securities.

India’s Nifty 50 and BSE Sensex have risen close to 10 percent after hitting multi-month lows in the initial days of the Ukraine-Russia war aided by the aggressive covering of short positions by speculators and buying from domestic institutions and retail investors.

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The continuous decline in the volatility gauge is also an indication of fatigue among bears in the market. Short positions by foreign investors in the March contract of the Nifty 50 index have fallen by 32,940 contracts in the past two weeks while their long positions on the index have risen by 25,115 contracts in the same period.

The decline in bears among foreign investors has come despite the US Federal Reserve raising interest rates by 25 basis points in mid-March and indicating that it may be open to multiple 50 basis point hikes in the coming monetary policy meetings.

The much-dreaded inversion of the US Treasury Bond curve over the past few days has also done little to dim the recovery in the risk appetite of investors as reflected in the positive close in US equities overnight and more than 0.4 percent rise in domestic equities on March 29.

Analysts believe that speculators holding short positions on the index will likely continue to cover their positions ahead of the expiry of the March derivative series on March 31 in order to avoid delivery, while expectations of high rollover of short bets are also low.

“Markets may scale higher in the near term as valuation is near long-term mean levels and market recoveries are swift after correction,” said brokerage firm Antique Broking in a recent note.

Chouhan of Kotak Securities believes that the Nifty 50 index should not face any hurdle in topping the 17,700 point mark this week, which will take the index within less than five percent of its all-time high hit in October 2021.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.



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Chiranjivi Chakraborty
first published: Mar 29, 2022 09:26 am
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