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The ongoing carnage in the Indian equity market is taking its toll on the psyche of Indian investors and traders. The level of panic among this fraternity is captured by India VIX – the volatility index based on Nifty options. This index hit an intra-day high of 29.96 on Wednesday; a 20-month high.
India VIX is an index of the fear ruling the minds of the investors. The index spikes up as the market plumbs lower levels and falls when the markets move northward. The index moved in a sedate band of between 12.5 and 18 since July 2012. But heightened risk perception in the market since this June saw the index moving above up. In the last one month, it rose 50 per cent.
Investors in the Indian markets are going through a torrid time with the floor caving in for most stocks. The NSE index, Nifty, has lost 13 per cent in the last month, spooked by the rupee that is spiralling lower to life-time lows, session after session.
Fear of foreign institutional investors pulling out of the equities segment is also beginning to play on everyone’s minds. This could become a reality if global liquidity dries up if the US Federal Reserve stops infusing liquidity to boost the US economy. Although foreign investors have pulled almost $4.5 billion out of the debt market so far this year, their net outflow from the equities segment has been a mere $137 million or around 1 per cent of the funds brought in so far this year. If FIIs begin pulling money out of equity, the high impact cost in the India market could cause sharp erosion in stock prices.
Historic volatility in many of the frontline stocks, such as Reliance Industries, State Bank of India, Infosys and Tata Steel, has also spiked since the beginning of August.
CBOE VIX
The volatility index that portrays the sentiment in the US market is the CBOE VIX, which is calculated using the option premiums of the S&P 500 index options. The CBOE VIX continues in the bull-market range at 14.9, indicating that investors in the US are not unduly worried.
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