Here's why Indian markets are jittery; check details here

The India VIX, also known as the volatility index, experienced a surge of over 100% in just 13 trading sessions till May 13. This sharp surge was propelled by a combination of factors, including the ongoing General Elections in the nation, relentless selling by foreign portfolio investors (FPIs), and broader global dynamics like the US Federal Reserve’s move on interest rates. Serving as a metric for gauging market expectations regarding volatility in the forthcoming 30 days, the India VIX is commonly recognised as the “fear gauge”.

Market watchers believe that during the Lok Sabha elections, the markets tend to be volatile, causing concern for traders. In 2019, the India VIX index hit a high of 28.66 during April-May, coinciding with the election period. This index is computed on the basis of the Nifty index option prices. A higher value indicates a higher anticipated volatility, while a lower value suggests that option traders are not expecting significant fluctuations.

The India VIX index climbed to 20.60 on May 13, the highest close since October 2022. The index was at 20.53 on May 18. Meanwhile, the benchmark Nifty 50 index plunged over 1% to 22,502 on May 18, against its all-time high of 22,794.70, which it scaled on May 3, 2024. On the other hand, the broader indices, like the Nifty Midcap 100 and Nifty Smallcap 100 also retreated nearly 0.09% and 0.7% from their respective all-time highs which they hit earlier this month.

Of late, the US Fed has kept its interest rate at 5.3% to curb inflation, which peaked at 9.1% in June 2022. The central bank has been keeping the policy rate on hold since July 2023.

But the fears of US inflation is not the only reason. According to analysts, traders are feeling anxious about voter turnout and have mixed sentiments regarding a decisive election outcome. The latest VIX reading hints at continuing volatility in the run-up to the election results on June 4. G. Chokkalingam, Founder of the market analysis firm Equinomics Research, says, “There is a little fear in the market due to the ongoing selling by foreign institutional investors. They may not come back before the election outcome. Therefore, the weakness in the market may continue. That is why the India VIX index also spiked in the recent past.”

Similarly, JM Financial in its weekly note said that the lower voter turnout in the first three phases of the elections have increased uncertainty, even if the consensus is still firmly rooting for a return of the incumbent. Echoing this view is Santosh Meena, Head of Research at the investment firm Swastika Investmart. He believes that a temporary easing is on the cards. “A temporary easing may occur in India VIX around the resistance point at 23, another uptick is likely before the announcement of the election results,” he says.

Global investors have offloaded shares worth more than Rs 28,000 crore on a month-to-date basis till May 17. In contrast, an inflow of Rs 34,008 crore by domestic institutional investors (DIIs) capped the downside in the equity markets during the same period. Sharing his views on the inflows of FPI, Saurabh Mukherjea, Founder and Chief Investment Officer of the portfolio management services firm, Marcellus Investment Managers, says, “If we get political stability, foreign money will again flood into India.”

Japan’s largest lender MUFG Bank believes that as long as BJP wins a majority in the Lok Sabha again (over 272 seats), markets should view the outcome of India’s general elections positively over time. There could be modest knee-jerk weakness in the rupee and risk assets if BJP loses some seats and maintains a majority. “We think this weakness should reverse over time as there will still be policy continuity in crucial areas,” it noted in its report.

Analysts, as a result, have advised market participants to stay light on positions. As for the reasons behind the aggressive FPI selling in May, V.K. Vijaykumar, Chief Investment Strategist at the brokerage firm Geojit Financial Services, says there is some confusion there.

“There are reports attributing the FPI selling to possible setbacks to the NDA/BJP in the elections. It is important to understand that the FPI selling is due to a change in FPI stance from ‘sell China, buy India’ earlier to ‘sell India, buy China’ now. This is likely to be a near-term trend triggered by the cheap valuations of Chinese stocks,” he says, adding that India’s long-term prospects are much better than China’s.  

@imrahuloberoi