While volatility has become integral to stock markets, and indeed every other financial market, the extent of sharp fluctuations recently seen across the major bourses worldwide is unprecedented. The VIX or volatility index traded on the Chicago Board Options Exchange reached its highest level in May after remaining steady for most of 2009. The index, which reflects the price investors are willing to pay to insure themselves against substantial market moves, is considered a reliable measure of recent investor uncertainty. Leading Indian stock indices, the Sensex and the Nifty, have also fluctuated. The Sensex has recently been moving in a wide band between 16,000 and 18,000 and is currently above 17,000. Indian stock prices have no doubt taken their cues from the Asian and other global stock exchanges, but the degree of correlation is less significant than it used to be. On the whole, Indian stocks have responded relatively well to the violently fluctuating stock prices abroad. This pattern of market behaviour is in contrast to the sharp erosion in market capitalisation during the height of the 2008 financial crisis.
However, it is premature to suggest that Indian markets have ‘decoupled' themselves from the volatile trends of the developed markets. Global nervousness arising out of the still unfathomable nature of the sovereign debt crisis in Europe has been magnified by concerns over fiscal policy in developed countries. There are fears that a simultaneous withdrawal of the stimulus packages by several countries will harm global recovery. In the United States, there are indications that the stimulus-fuelled recovery might peter out. All this has a bearing on investment in India, although the country's strong macroeconomic performance and other positive factors have helped bring some stability to its financial markets. The economy has grown by 7.4 per cent and the proceeds from the telecom spectrum auctions will help in fiscal consolidation. Fortunately, India's key vulnerability — the way its current account is funded through foreign institutional flows — is not exposed to the extent it was in 2008. Foreign investors have been net sellers on a few days but the movement has not been wholly one way. And if that set off a slight depreciation of the rupee, it has only helped exporters. Extreme volatility will harm markets and can choke nascent global recovery. India, like the rest of the world, will be hoping for the global uncertainties to end.