What causes a volatile stock market? FPI selling, Russia-Ukraine war, RBI rate hikes

Market volatility measures the rate of movement in individual stock prices and indices. This article discusses what market volatility is and the factors behind it.

Top 3 factors driving the present market volatility in India.

Since the start of 2022, stock market volatility has increased significantly. Since this volatility comes after the spectacular rally witnessed in 2020 and 2021, most investors were caught off-guard. This article focuses on what market volatility is and the reasons behind the current volatility.

What is stock market volatility?

Stock market volatility refers to the index and individual stock price movements on an intraday basis and over a specified period. This period can be a day, a week, a month, etc. Earlier, broader indices such as the Nifty 50 moved around 1% in a day. But these days, 2%-3% market movement in a day is quite common. We now see Nifty making a big up move on one day, only to make a big down move the next day, and this trend continues.

Even intraday movements are quite sharp. We often see a big gap up at the start of the trading session; in the second half, big selling happens, dragging the index down. On some days, there is a gap down at the start of the trading session, and in the second half, there is a big recovery. Such a volatile stock market can scare investors.

Also Read: 4 Strategies For Handling Extreme Market Volatility

Indian stock market volatility is measured through the India VIX (volatility index).

Chart: India VIX 1-year chart

INDIA VIX CHART

The above chart shows how the India VIX spiked between February and April 2022. There are several reasons for the spike in volatility, such as:

1) Selling by Foreign Institutional Investors (FIIs)

Since October 2021, Foreign Portfolio Investors (FPIs) have been selling Indian stocks as inflation has been steadily rising in many countries, including the US. This has rattled global markets, including India. The US Federal Reserve has started hiking interest rates. FPIs have been selling Indian equities due to concerns about high valuations. They are investing the sale proceeds in fixed income in their home country (US), which has turned attractive due to high yields. The FPI selling on the one hand and the strong DII (Domestic Institutional Investors) buying on the other have led to a lot of market volatility.

Also Read: A Look At How Are Women Investing And Ruling The Stock Market

2) The Russia-Ukraine conflict

While FPIs were already selling Indian equities since October 2021, the start of the Russia-Ukraine war in February 2022 accelerated the selling process. The conflict has led to a spike in the prices of crude oil, metals, food grain, etc. The war and the lockdowns due to the rise in COVID-19 cases in China have choked supply chains. War concerns on one side and reasonable market valuations due to good earnings and price correction on the other have led to a lot of market volatility. Retail individuals investing through regular SIPs have been supporting the market.

3) Inflation and RBI rate hikes

Due to high commodity prices and a loose monetary policy, inflation has spiked in India also. As a result, the RBI has started withdrawing excess liquidity and hiking interest rates. Usually, inflation and the stock markets have an inverse relation. Market participants are trying to assess how high interest rates will impact economic growth leading to market volatility.

Also Read: RBI Hikes Repo Rate By 50 Bps Amid Rising Inflation Forecast. Here's How It Will Impact Your EMI And Savings

Conclusion

Many global central banks, including the RBI, have just started the interest rate hiking cycle. Market participants are trying to assess how and when the high interest rates will bring down inflation within the tolerance levels of the central banks. The Russia-Ukraine war has been going on for 100 days now. China has recently eased lockdowns in some cities, including Shanghai. 

Till we have clarity on events like inflation coming down, the ending of the Russia-Ukraine war, and supply chains easing, market volatility is here to stay. Market participants should brace themselves for continued volatility, get used to it, and continue with their investment strategies.

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