India VIX slipped nearly 20% in Tuesday's trade; here is what investors need to know

India VIX which is a volatility index calculated by the NSE from the order book of Nifty options slipped as much as 20 per cent in Tuesday's trade. However, it recovered in Wednesday's trade and gained over 2 per cent. 

The market’s volatility gauge closed at 10.19 on Tuesday, before hitting a low of 9.8 intraday. However, the Nifty50 index ended 31.6 points, or 0.14 per cent, higher at 22,368, and the Sensex settled with a gain of 89.83 points, or 0.12 per cent, at 73,738.45.

A few factors that could have contributed to the fall may include easing tensions in the Middle East, expectations of a strong mandate to the ruling party in the ongoing Lok Sabha elections, and continued strength in the domestic macroeconomic environment.

Atul Parakh, CEO of Bigul believes a decline in the volatility index (VIX) has been observed as markets may have factored in the continuation of the current regime in the general elections and easing of geopolitical tensions.

As per Jigar S Patel, Senior Manager - Technical Research, Anand Rathi Shares, and Stock Brokers, in late December 2023, the India VIX finally broke a bear trendline that had persisted for approximately 3.7 years, marking a significant shift in market sentiment. Despite multiple attempts prior to December 2023, the VIX struggled to breach this trendline. The recent trading session witnessed a remarkable decline of almost 19-20 per cent in the India VIX, a level of decrease not observed in nearly five years.

Patel added that such substantial drops in the India VIX were last observed during significant events, notably the announcement of general election results. For instance, in both 2014 and 2019, the VIX plummeted by approximately 34 per cent and 30 per cent, respectively, on the day election results were revealed.

James, Chief Market Strategist, Geojit Financial Services believes that this sudden fall in the VIX should be factored in when acting on the VIX’s signal.

What does India VIX depict?

"Theoretically VIX depicts the volatility expectation for the next 30 calendar days. So, the lower the VIX the more confident, the traders are about the ongoing upswing. Options traders also react to such scenarios by reducing the expectation of premium expansion," said Geojit Financial Services' James.

He added it is important to note that VIX is calculated based on bid-ask quotes of near as well as next month's Nifty option contracts, and contracts expiring from April 26 onwards would have a lot size of 25, half of what is in play now, which could have a role in bid asks getting tighter.

"It could mean the market does not expect any volatility in the run-up to the elections and beyond and either the traders are getting complacent, or that there are enough reasons for the market to be stable," said Bigul's Parakh.

TECHNICAL VIEW

"Analysing technical charts reveals that the India VIX is currently hovering near a historical support level ranging from 9 to 8. Meanwhile, the Nifty, a benchmark index for the Indian equity market, is trading close to its resistance zone of 22450-22500. Given this context, with the India VIX positioned near a support zone and the Nifty near resistance, thus we anticipate a correction of at least 200-250 points in the Nifty over the next few trading sessions," said Anand Rathi Shares, and Stock Brokers' Patel.

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