Indian Market Experiences Volatility Amid Nifty Rebalance and Expiry Day Activity

Indian stock markets witnessed significant volatility on Tuesday during the closing auction session, registering the second-highest volume ever recorded for this period. This activity coincided with the Nifty index's half-yearly rebalance and the September monthly expiry, combining to create notable market fluctuations.

The Nifty index closed at 22,716.2 points, down 0.28 percent from the previous day, after experiencing intraday declines of up to 0.9 percent. Meanwhile, the Sensex ended at 72,529.07 points, slipping 0.33 percent. Market participants attributed the sharp swings primarily to increased derivatives activity, particularly in options contracts.

Shai Coelho, founder of the market data provider Vtrender, explained that the volatility was mainly due to short covering in the 22,800 strike put options early in the session. Traders who had implemented straddle strategies—shorting both calls and puts at the 22,800 level—were caught off guard when the market opened lower. This forced them to cover their positions rapidly, resulting in a sharp dip in the index and a surge in contract volumes.

Specifically, the 22,800 put option, which opened at approximately Rs 8.4 on Monday morning when the Nifty was near 23,065, reached a high of Rs 233 on Tuesday. This dramatic price movement highlighted the intensity of the derivatives trading activity on expiry day.

At the National Stock Exchange, turnover during the closing auction session hit Rs 24,503.7 crore, marking the second-highest since the CAS mechanism was introduced in August. Notably, two companies—BSE and Wipro—accounted for nearly 34 percent of this turnover, reflecting the fact that BSE replaced Wipro in the Nifty 50 benchmark.

On the global front, US 10-year Treasury yields hovered around 5.22 percent in the evening, while Brent crude oil prices eased slightly to $103.3 per barrel. Among Asian markets, the mood was mostly negative with Taiwan falling 0.8 percent, Japan dropping 0.6 percent, Hong Kong slipping 0.5 percent, and South Korea declining 0.3 percent. China was an exception, gaining 0.2 percent.

Despite these movements, macroeconomic conditions continue to pressure the Indian equity markets. Siddhartha Khemka, senior group vice-president and head of retail research at Motilal Oswal Financial Services, noted that persistent selling by foreign institutional investors is weighing on the markets. Rising US bond yields and elevated crude oil prices add to inflationary concerns, which may dampen investor sentiment.

However, after a 7 percent correction in the Nifty over the past seven weeks, valuations appear more reasonable. Domestic earnings reports and gross domestic product data remain supportive, offering some relief to investors. Still, broader market indices struggled, with the Nifty Midcap 150 and Smallcap 250 falling by 1 percent and 0.65 percent respectively. The India Volatility Index (Vix) eased 2.3 percent to 13.32.

Khemka cautioned that ongoing macroeconomic uncertainties could limit the Nifty’s earnings growth projection of 15-16 percent and keep the index within a range of 22,000 to 25,000 points. He identified sectors like pharmaceuticals, healthcare, domestic exporters, and new-age technology firms as likely to show relative resilience amid the challenging environment.

In corporate developments, Aditya Birla Sun Life Asset Management Company (ABSL AMC) launched a new brand identity for its passive investment business on Tuesday. The company introduced the 'Birla Passives' brand, under which it will house its index funds, exchange-traded funds (ETFs), and fund of funds operations.

The AMC also unveiled two new schemes—the ABSL BSE Total Market Index Fund and the ABSL BSE Total Market ETF. These funds are the first to track the BSE Total Market Index, which covers approximately 93 percent of India’s listed market capitalization. Hemen Bhatia, Head of Passives at ABSL AMC, highlighted that the index’s adaptive constituent framework allows it to grow alongside India’s evolving capital markets, in contrast to traditional indices with fixed stock counts.

This move by ABSL AMC reflects a growing trend in the asset management industry to expand passive investment options, offering investors broader market exposure with cost efficiencies. As the Indian market continues to develop, passive funds tracking comprehensive indices like the BSE Total Market Index are gaining traction among retail and institutional investors alike.