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Equity market: storm approaching?

nifty, sensex, market, economy, bank, non banking finance company, NBFC, NPA, stressed assets

  • By Ranjan Chakravarty

  • A dramatically dropping Bank Nifty has set off alarm bells in the markets for the past few weeks. Over the month of July alone, it has dropped 2,688 points. 30th July’s 700 point drop has reinforced the alarm. Dire predictions on NPAs, especially in the NBFCs abound, and demand-supply dislocations in interest-sensitive stocks like automobiles are in the foreground. The earnings season has been disastrous to date. And to top it all, foreign portfolio investors are seen as rethinking the India strategy post the Union Budget. So is July delivering a perfect storm in more ways than one in the financial capital?

    We say the answer is Not Quite.

    Let us examine VIX, the universally accepted bear indicator for markets worldwide. The value of the India VIX, at 13.5 as on July 30, has come close to its monthly high of 14.6.  That is fair, given the roiling. However, what is significant is that the market had actually priced in greater uncertainty than has come to pass right on July 1 when the value of 14.6 was reported.  Viewed from a slightly longer perspective, VIX has been steadily dropping from its peak of 28.66 on May 15. Taking a year-long view, we see that it is actually close to its lowest point of 12.5 from August 1st of 2018.  

    To see how this has translated into asset prices, let us look at the prime focus: Bank Nifty. Though losses in July have been significant, they represent 12 stocks and carry within them the question marks that are justifiably upon the financials in the current scenario. Examined over a slightly longer period, i.e. over the last six months, we see that it is a roiling but not exactly a meltdown, given that the current (as on July 30) value is still almost 1,000 points away from the low of Feb 28th. Over a one year window, the bottom was in October 2018, when it was almost 4,000 points lower than its value as on today, July 30.

    The broad index, Nifty, has lost 250 points on July 30, 290 points from July 24, and about 700 points over the month. However, over the last six months, it shows a 2,000 point gain. Seen from its lowest point over the last year, Oct 5, 2018, however, it has shown a clear gain of close to 4,500 points. 

    Based on this data that we see no evidence that a perfect storm is about to break upon the broad market. There is evidence that there are localized concerns in financials, and they are being repriced accordingly by the market. On the broader front, we see the weather being choppy, which in fact may be healthy, showing the real sensitivity of the market, but not even close to devastating.

    The author works in the domain of product strategy in Metropolitan Stock Exchange.