Author : Prof. Tamal Dutta Chaudhuri, Principal, Calcutta Business School
The stock market has been recently trading at quite high levels and the NIFTY closed at 10389 levels on Friday, November 24, 2017. There is talk that it will cross 11000 levels by the year end. The issue is, is this plausible?
Figure 1 shows that, broadly NIFTY (blue) and India VIX (red) are inversely related. India VIX has been experiencing an overall downward trend since 2011, although there have been volatility spikes and marker corrections. Figure 2 shows upward trend in India VIX from May 2017 and a cup and handle formation during February to August 2017. After that India VIX has seen a double bottom, and subsequently it has refused to fall further
In Figure 3, the Andrew’s Pitchfork formation and the Fibonacci Fan do not indicate a strong downward movement in the India VIX. Thus, overall market apprehension remains and market corrections are being factored in, in decision making.
Nifty started at a level of 7963 on 1st. January, 2017. To keep the ratio of Market Capitalization to GDP to be constant, and assuming a rate of GDP growth of around 7.5% in 2017-18, we should see NIFTY touch 8560 levels in the next 4 months. We can have two scenarios. First, Nifty falls from 10389 levels to 8560 levels, a drop of around 1800 points in the next 4 months. Second, the ratio market capitalization to GDP rises to say .90 levels or more. The latter can only happen with significant FII inflow, as domestic savings growth alone cannot support this, without huge portfolio reallocation from debt to equity. Already interest rates in banks have gone down significantly, and hence this increased interest in stock market, both direct, and through mutual funds. If interest rates do not fall further, I do not see the possibility of a further significant rise in NIFTY in the next 4 months. This probably is reflected in the increase in the trend gradient of India VIX in Figure 2.