NIFTY 50 volatility the last couple of years have been extremely low by historical standards. If you look at the rolling median of weekly returns over 50 weeks (about a year), you can see how the range has narrowed:
The standard deviation, a popular measure of volatility, has come down as well:
As the charts illustrate, the markets have been moving in tight ranges. And narratives have been built around it:
- Global central banks (US, Europe, Japan) have been flooding the markets with liquidity, essentially writing a put on the market.
- Markets have become less riskier thanks to increased regulations after the 2008 global financial crisis.
- Investors have a new-found enthusiasm for “SIP it and forget it.” This, plus the NPS bid, has cushioned the NIFTY 50.
- Increased liquidity in the derivatives market has allowed investors to buy volatility, thereby reducing the need to decrease risk by offloading equities in the cash market.
- The majority government at the center has provided policy certainty and political scams have not paralyzed decision making.
Narratives can change overnight. And if the last few months have taught us anything, the market drives the narrative. Also, new investors have only seen a low volatility environment and think it to be “normal.” So any reversion to the old volatility regime would be a rude awakening. Are we really in a new world or is volatility about to revert to its longer-term mean?