India VIX Index Soars: What Does Market Volatility Mean for Investors?

India VIX Surges: Understanding Market Volatility and Its Impact on Investors

The India VIX index, an indicator of expected market volatility over the near term, surged past 21 on Tuesday, May 14. This rise indicates increased fear among traders regarding market volatility, especially compared to two weeks ago. Currently, concerns stem from the ongoing Lok Sabha elections.

What is the Volatility Index?

The Volatility Index, or VIX, often referred to as the Fear Index, measures the market’s expectation of volatility in the near term. Volatility represents the rate and magnitude of price changes and is frequently associated with risk in finance. During volatile periods, markets tend to swing sharply, causing the VIX to rise. Conversely, as volatility decreases, the VIX declines.

The VIX gauges how much an underlying index is expected to fluctuate in the near term, expressed as annualized volatility in percentage terms. The Chicago Board of Options Exchange (CBOE) introduced the VIX for US markets in 1993, based on S&P 100 Index options. In 2003, it was updated to use S&P 500 Index options. Since then, it has become a key indicator for assessing market volatility, guiding investors in their decision-making.

What is India VIX?

India VIX, calculated by the NSE, is based on NIFTY options’ order book. It reflects the market’s expected volatility over the next 30 days. Higher India VIX values indicate higher expected volatility and vice versa. The term ‘VIX’ is a trademark of the CBOE, licensed to NSE for India VIX.

Why Has India VIX Surged?

India VIX has climbed approximately 53% in May, reaching 21.88 on Tuesday afternoon. On Monday, it jumped 16% to hit 21.48 during intraday trading, settling at 20.6. The BSE Sensex also rose 998 points from intraday lows, closing 112 points up at 72,776.13. Similarly, the NSE Nifty ended 48.85 points higher at 22,104.05 after an almost 1% drop during the day.

This volatility coincides with uncertainty over the ongoing election results, due on June 4. Market participants note that a lower voter turnout might affect the BJP’s seat count. Additionally, heavy selling by foreign portfolio investors, who offloaded Rs 18,375 crore of Indian equities by May 13, contributed to market fluctuations.

“A critical domestic event like the Lok Sabha elections brings a certain level of uncertainty about the outcome. Similar fears or uncertainties were observed during the 2014 and 2019 elections,” said Sahaj Agarwal, Senior Vice President of Derivatives Research at Kotak Securities. A high VIX indicates that participants are becoming more cautious and expect increased volatility as the event unfolds.

India VIX often rises ahead of significant events like elections that could impact market direction. As expectations shift, the VIX responds accordingly, said Deepak Jasani, Head of Retail Research at HDFC Securities Ltd. “However, this time, the VIX has risen more slowly than in previous elections, likely due to lower initial uncertainty about the outcome,” he added.

What is the Outlook for India VIX?

According to Anand James, Chief Market Strategist at Geojit Financial Services, current VIX behavior resembles the period before the 2019 election results. “Back then, markets peaked in March, and VIX soared to 28.6. Previously, VIX ranged between 20-14 over six months, indicating sustained high volatility expectations. In contrast, the recent rise from record lows to over 20 has occurred within a fortnight,” James noted. This rapid change suggests potential for further VIX increases, though a cooldown might occur before election results are announced.

HDFC Securities’ Jasani predicts VIX could rise and peak before the 6th or 7th election phases, then fall sharply once results are out.

What Should Investors Do?

Kotak Securities’ Agarwal advises caution, stating that India VIX alone doesn’t dictate market direction. “Considering all parameters, we believe the markets are in a corrective or consolidation phase. Only a move above 23,000 would shift the outlook to buying on dips for higher targets. Until then, I recommend a passive approach to broader markets and selective positivity,” he said.

Investors should stay informed and cautious, considering the heightened volatility and potential for significant market moves.