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VIX index suggests worst over for markets in short to medium term...

ICICI Securities 21 Mar 2022

What's Buzzing:

The US volatility index (VIX) has moved to its one month lows as equities embraced/digested the Fed rate hike. The recent declines from highs of 38 to below 24 may be a signal that the worst to be over for equities.

Context:

With the reverse correlation of volatility with equities, a rising VIX is an indicator of weakening equities. While US VIX has continued to rise due to concerns related to monetary policy, Indian Volatility Index (India VIX) remained below 30 levels after the February expiry when it tested almost 34 due to expiry related pressure.

Even continued FII selling of almost $1 billion in the first couple of the weeks during the March series did not move India VIX above 30 levels, suggesting expectations of a recovery in equities.

Our Perspective:

Since the volatility index suggests perceived risk in the market from a short to medium term perspective, a decline in volatility is always a welcome development. Current VIX levels do not specifically indicates an ‘out of the woods’ scenario as it is still above its previous lows (February low below 20 for both India and US). However, the significant resilience shown in the first half of March amid highest ever FII selling followed by a sharp recovery in broader indices, suggests expectations of limited downsides.

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