D-Street not budgeting for big bang news

Historically, the volatility index, or VIX, a measure of near-term risk for the stock market, has spiked before the Union Budget in anticipation of market-moving announcements on the day. But this time, the fear gauge has drifted lower ahead of the Budget on Friday. Analysts said fewer expectations that the Budget announcements would cause sharp moves has resulted in volatility remaining sedate before the event.

The India VIX dropped 5 per cent to 13.5 on Wednesday and has fallen 15 per cent in the last one month.

The Nifty’s implied volatility (as on Wednesday) is the lowest ever before a Union Budget, said Yogesh Radke, head of alternative and quantitative research at Edelweiss.

“We are just two days away from the Union Budget and market participants seem to have stamped this as a non-event for the equity market,” said Radke. "Historically, the IVs do inch up by 3-4 percentage points before the Budget and eventually drop on the Budget day.”

The India VIX had gained 11.2 per cent in the month ahead of the interim Budget on February 1 this year to 17.12 level a day before the event. VIX had gained 25.7 per cent in the one month up to the Budget in February 2018 to 15.93, and rose 8.8 per cent during the same period before the Budget in February 2017 to 16.83. Analysts said volatility usually surges before crucial events like Budget and election results as uncertainty about the outcome prompts traders and investors to buy options as hedges.

This time, the mood is indifferent as investors are uncertain about what to expect from the new Finance Minister, Nirmala Sitharaman. Investors reckon that the stress in the non-banking finance sector, a slowing economy and limited finances give the government little room to beat market expectations.

"Market’s expectations from the Budget are quite low. Although directional guidance may come in the Budget on macro issues, no major big bang new announcement or reforms are expected," said Deepak Jasani, head of retail research at HDFC Securities. "A deviation of 10 basis points or so from fiscal deficit target of 3.4 per cent will be accepted, but a higher slippage could worry FIIs especially because the combined deficit (including state deficit and off balance items) is still higher.”

The Nifty has fallen 1.4 per cent in the last one month. Analysts said that the fall in VIX is also because it had run up sharply ahead of national polls. VIX had touched a 52-week high of 30.18 on May 22 --- a day before the election results were announced.

“Volatility is subdued this time. The same government is announcing the Budget,” said Amit Gupta, head of derivatives at ICICIdirect. “Volatility has come down from 30 levels and not increased. The same positive bias should be maintained after the Budget as well.”