Plunge in India VIX ahead of Budget indicates stability; is Nifty eyeing 12,400?

In just three trading sessions in July, Indian VIX—the measure of volatilty—has fallen by about 9 percent. The fall, from 14.95 on June 28 to 13.69 on July 3, suggests that a sustainable move on the upside could be possible.

Benchmark indices in July have been consolidating in a range and have been trading close to their all-time highs.

“The volatility index has been falling despite Union Budget is scheduled on July 5. We believe such low implied volatility is indeed a positive indication for the near term,” Sneha Seth of Angel Broking said. “Thus, we maintain our optimistic stance on the market and soon expect Nifty to rally beyond the immediate hurdle of 12,000.”

Experts suggest a pro-growth Budget could push the index beyond 12,000 on July 5, and if the momentum sustains, a move above 12,103 to a new record high is possible intraday.

“We expect the Nifty to resolve out of upper band of the last one month’s consolidation (12,000) in the coming sessions and head towards our earmarked target 12,400 in coming weeks,” Dharmesh Shah, Head Technical at ICICIdirect.com Research told Moneycontrol.

“Meanwhile, volatility would remain elevated owing to the upcoming Union Budget session. Therefore, temporary cool off towards 11,800-11,750 should be utilised as an incremental buying opportunity in quality stocks,” he said.

Structurally, over the past 21 sessions, the index has retraced 90 percent of preceding 11 sessions up move, i.e., from 11,590 to 12,100. Elongated consolidation period along with almost equivalent price correction signifies strong base formation at key support threshold of 11,600-11,500.

Ahead of the Budget, foreign institutional investors (FIIs) have also reduced their positions in the markets that suggest institutional investors are resorting to hedging, experts say.

“We believe FIIs have reduced their net positions in the last couple of days, which is normal as, during events that are more of an option play, they hedge their overall portfolios,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.

“In derivatives, it [FII positions] is down almost 25 percent in the last couple of days. Secondly, it is pretty much usual whenever there is an event around. Though we can look at it as it is just the beginning of the July series, usually the case is just precaution,” he said.

Nadeem further added that weekly options data suggest the trading range is between 11,800 and 12,000, which can be increased if market shows confidence to 11,800-12,200.