India VIX slips despite market correction in the past few weeks

India VIX, a measure of investors’ perception about the risk of sharp swings based on options prices, has retreated despite the sharp fall in the market in the past few weeks.

Since the Budget, the fear gauge has slid nearly 19 per cent, even as the Nifty has slid 4.3 per cent. “Typically, the market and India VIX have an inverse relation, but post the Budget, the gauge has not quite behaved the way it should,” said Sneha Seth, derivatives analyst, Angel Broking.

VIX is meant to indicate investors’ perception of the annual market volatility over the next 30 calendar days. The higher the value, the higher is the expected volatility and vice-versa.

For example, if India VIX is 12, this represents an expected annual change of 12 per cent in the Nifty over the next 30 days. This implies the value of the Nifty is projected to move in a band of 12 per cent (on both upper and lower sides) over the next one year for the next 30 days. So, if the Nifty is at 11,000, the expected range of the Nifty for the next year is between 9,680 and 12,320.

The gauge has remained range-bound for most of this year but saw a spike in April and May, touching a high of 28.6 on May 15. VIX touched its historical peak of 85.13 on November 17, 2008, in the aftermath of the collapse of Lehman Brothers.

Market participants don't expect the volatility index to move up much in the next few months. “It will increase only if the markets correct significantly and break the 11,100-11,200 levels,” said Seth.

Experts believe that investor sentiment has dampened after disappointing quarterly corporate results and the IMF lowering India’s growth outlook. The hike in surcharge on foreign portfolio investors (FPIs) registered as trusts or association of persons has also impacted sentiment, resulting in FPIs selling stocks worth $1.2 billion so far this month.

Selling pressure from FPIs could continue, believe analysts, as these have rolled over their short positions in the last series. The long-short ratio has dropped, indicating a build-up of short positions.