India’s crypto and equities correlation has spiked 10-fold since pandemic

The International Monetary Fund (IMF) has observed that the correlation between the cryptocurrency market and India’s equities has surged tenfold since the onset of the pandemic. 

The agency highlighted that the increasing correlation could be tied to limited risk diversification benefits within the cryptocurrency market, the IMF said in a blog post published on August 21. 

Furthermore, the IMF noted that the correlation between equities and cryptocurrencies is widespread across Asia, citing the growth of digital currencies in the region. 

“Key drivers of the increased interconnectedness of crypto and equity markets in Asia could include growing acceptance of crypto-related platforms and investment vehicles in the stock market and at the over-the-counter market, or more generally growing crypto adoption by retail and institutional investors in Asia, many of whom have positions in both the equity and crypto markets,” IMF said. 

The correlation has also been observed in other markets including Vietnam and Thailand. 

Volatility correlation increasing 

At the same time, the IMF, which is relentlessly pushing for global crypto regulations, noted that volatility correlations between the two sectors in India has increased threefold since the pandemic. 

Based on this observation, the agency suggested that it could be due to possible spillovers of risk sentiment among the crypto and equity markets.

“Before the pandemic, crypto seemed insulated from the financial system. Bitcoin (BTC) and other assets showed little correlation with Asian equity markets, which helped diffuse financial stability concerns,” it said in the post.

Push for uniform regulations 

In the post, IMF further reiterated the importance of regulating the crypto sector by establishing regulatory frameworks that focus on the use of certain digital assets within a country. The body challenged the region to enact coordinated regulations across jurisdictions.

Besides Asia, crypto and equities have increasingly correlated globally amid the high inflation and increased interest rates. As reported by Finbold in May, Bitcoin’s correlation with the S&P 500 reached a new all-time high.

Consequently, the IMF had earlier ruled out cryptocurrencies as an investment hedge based on the increasing correlation. The institution argued that the correlation means that the crypto market volatility might spill over into equities, posing a threat to financial stability.