India VIX Fall Explained: Why The Market Fear Gauge Recorded Sharpest Slump In 5 Years

India VIX witnessed a sharp decline of around 22 per cent on Tuesday in one of its worst single-day falls in the stock market’s history.
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India VIX, a gauge of volatility in the Indian stock markets, hovered around 11.08 in the afternoon on April 25, after falling to a 5-month low to below 10 on April 23. The VIX witnessed a sharp decline of around 22 per cent on Tuesday in one of its worst single-day falls in the stock market’s history. The index is currently trading close to its all-time lows, as per data. On Tuesday, the index settled 19.7 per cent lower at the 10.2 level.

India VIX, based on the Nifty 50’s option prices, indicates the perception of market volatility in the near term. A higher value means a greater expectation of volatility, and a lower value means anticipation of low volatility.

Such sharp falls in India VIX were last seen once the general election results were announced in the past. For instance, in 2014 and 2019, India's VIX dropped by almost 34 per cent and 30 per cent, respectively on the day of the results. The fall on Tuesday was the biggest fall it has seen after these two fall back in 2014 and 2019.

The recent steep decline in India VIX can be attributed to several factors including the de-escalation of war tensions and the unfolding of the electoral landscape aligning favorably with the incumbent BJP government.

Why Volatility Index VIX India Recorded Sharpest Fall In Five Years?

According to analysts, the fall in India VIX indicates that traders are more confident about the ongoing upswing to last irrespective of the election results.

Apurva Sheth Head of Market Perspectives & Research at SAMCO Securities says one must note that markets are normally inversely related to each other. A low VIX means that the uptrend could be challenged in the near term. “It also means that the market expects Nifty to trade in a narrow range in the near future. A VIX level of 10 means that the market’s expectation for Nifty is +/- 2.89 percent for the next one month,” added Sheth.

Anand James, Chief Market Strategist at Geojit Financial Services says that option traders react to such scenarios by reducing the expectation of premium expansion. “But the suddenness of VIX’s fall on Tuesday, especially when Nifty barely rose above 0.5 per cent, needs to be factored in when acting on the VIX’s signal,” he said.

Another reason for the fall in VIX could be NSE’s decision to reduce the lost size of Nifty derivative contracts to 25 from 50 from April 26.

“VIX is calculated on the basis of bid-ask quotes of near as well as next month Nifty option contracts, and contracts expiring from 26th April onwards would be having a lot size of 25, half of what is in play now, which could have a role in bid asks getting tighter," James said.

Analysts also believe that the sharp decline in India VIX on April 23, 2024, has been mostly on account of the positive sentiment, and the markets are largely factoring in most of the global and domestic concerns at the current levels.

Ajit Mishra, senior vice-president for technical research at Religare Broking says the markets believe that the risk factors including the geopolitical situation, concerns regarding March 2024 quarter corporate earnings, and the outcome of Lok Sabha elections 2024 are baked into the current stock prices.

India VIX had started to trend up from 10.6 levels in April 2024 beginning. That said, now that the price-wise correction is over, the markets may see some time-wise correction/consolidation," he said.

The India VIX gauges near-term market volatility expectations by analyzing traders’ outlooks reflected in option prices. It quantifies the projected percentage shift in the underlying index (e.g. Nifty) over the ensuing 30 days, derived from options market speculation.

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