Brace For Volatility

Last Wednesday, the domestic market experienced an unexpected fall due to expected meltdown in Chinese markets and frontline indices like Sensex and Nifty closed lower by 1.7 per cent each. The investors lost wealth by Rs 1.33 lakh crore over massive sell-off in a single trading session. The market participants became cautious over concerns about renewed fears over Chinese markets and a probable exit of Greece from Euro zone.

However, the Indian market is at the same level that was couple of weeks ago despite of considerable weakness across the major markets globally. The US markets are down by almost 2 to 3 per cent, while the European markets were down by almost 6 to 9 per cent during last couple of weeks. Similarly, the Chinese equity market barometer Shanghai index was down by more than 25 per cent during the same period. Interestingly, the foreign institutional investors (FIIs) and domestic institutional investors (DIIs) were net buyers during last fortnight and bought Indian equity worth of Rs 2855 crore and Rs 834 crore respectively during the period.

Meanwhile, the Greece declined to repay its debt commitment to International Monetary Fund (IMF), one of its creditors. As a repercussion, the IMF declared Greece as bankrupt country. The Greece also took public poll on the austerity and the Greece people voted for Big No in favor of Grexit. However, the Greek government just laid down its plans for another bailout to its European creditors. Greece is asking for a 3 years bailout from the European Stability Mechanism (ESM) along with most of the terms accepted by the government. However, the Greece debt crisis will have very little direct impact on Indian economy due to marginal exposure to Greece. There may be indirect impact on the domestic economy. However, this impact is already discounted in the domestic markets and the volatility was only due to volatility in other global markets.

On the other side, the China's Shanghai Stock Index crashed by 8 per cent on last Wednesday, despite the  government’s measure to boost up the falling market. Bloomberg news reported that around 43 per cent of listed companies halted trading on Chinese exchanges, accounting for 1249 companies in an attempt to prevent further losses. As a result of stock market collapse, with so many companies suspending trading, it will hurt market liquidity. Earlier, the Chinese Government announced new measures which include allowing insurance companies to invest more equity assets and preference to buy the shares of smaller companies.

Meanwhile, the net inflow to India’s equity mutual fund during June stood at Rs 123 billion which is the second highest as per Deutsche Bank Equity research. As a consequence of strong inflows, the assets under management for equity funds in June 2015 shot up to a record level of Rs 3723 billion. This very fact clearly showed expectation of “Aache Din” for Indian economy and volatility over global events can be used as accumulating opportunity.