Equity market in India perhaps rose excessively in Jan: RBI

NEW DELHI: The Reserve Bank of India (RBI) in its monetary policy report said a sharp rise in domestic equity indices in the second half of January and the dramatic correction in the first half of February were both associated with heightened volatility.

The domestic stock market and volatility both moved in tandem during the second half of January 2018 ,with the correlation co-efficient being 0.88.

US markets witnessed a similar aberration as the S&P500 and VIX moved together with a correlation co-efficient of 0.70, RBI said in its April policy report. India VIX generally has inverse correlation with equities.

“The increase in volatility during the first week of February resulted from spillover of enhanced volatility in global markets, as rising bond yields triggered sell-off in stocks, which was exacerbated by collapse of several complex volatility-linked funds and algorithmic trading strategies tied to market volatility," it said.

Domestic benchmark indices fell 5 per cent in February and 3.6 per cent in March. The decline in March and more to do with fears of trade wars triggered by the announcement of tariffs on steel and aluminium imports by the US administration and plan to impose tariff on Chinese goods, RBI said.

Meanwhile, RBI noted that the put-call ratio, an indicator of market expectations, broadly remained stable and stayed below one in India.

"These configurations suggest that the equity market in India had perhaps risen excessively and that a correction – rather than a bearish phase – was imminent. The sharp correction in equity indices led to the restoration of the inverse relationship between the VIX and Nifty50 in February, with the correlation co-efficient being -0.31,” it said.