Volatility index India Vix records steepest slump in nearly 5 years

Poll expectations, easing of global tensions likely causes

The India Vix, a gauge for market volatility, posted its steepest fall in five years on Tuesday and finished close to record low levels. Analysts said markets may have factored in continuation of the current regime in the general elections. Easing of geopolitical tensions after Israel's relatively muted response to Iran's drone and missile strikes may have also contributed to the index declining 19.7 per cent to end the session at 10.2.

This was the steepest correction since May 23, 2019, when the results of the 17th Lok Sabha elections were declared, and was the 12th biggest single-day fall for the index since 2008. Unlike now, almost all the bigger declines have largely occurred on elevated Vix levels.

“Such sharp falls in India Vix were last seen once the general election results were announced. In 2014 and 2019, it dropped by almost 34 per cent, and 30 per cent, respectively, on the day of results. Today’s drop is the biggest fall after these two falls,” said Apurva Sheth, head, market perspectives and research, SAMCO Securities.

Normally, India Vix cools off after the election results are announced as uncertainty is out. However, this time, markets may have already factored in a victory for the BJP-led NDA due to a weak show by the Opposition, said Sheth.

The sudden drop in Vix could also be attributed to the reduction in lot sizes in options contracts. Investors' focus this week has shifted to earnings after turbulence fuelled by concerns about geopolitical tensions and the delay in rate cuts by the US Federal Reserve.

Also known as the fear gauge, the National Stock Exchange (NSE) calculates the index to measure market anticipation of volatility and fluctuations in the near term. The index is calculated based on option prices. A low reading on the index indicates that traders are not expecting wild swings in the market. Similarly, a higher reading — usually seen ahead of big events such as election results, or the Union Budget — is indicative of uncertainty among market players.

"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," said Anand James, chief market strategist, Geojit Financial Services.

The reduction of lot sizes of Nifty option contracts from 50 to 25 starting from the May expiry is likely to increase liquidity and reduce the bid-ask spread of call and put options, which could have led to a fall in the fear gauge.

Some market participants said the huge slump seen on Tuesday, even as elections were underway, was unusual. They said it was on account of erroneous option prices displayed on Tuesday across various strike prices. Unlike in the US, Vix is not traded in India. As a result, the India Vix has only notional significance.  

Trading in the Chicago Board Options Exchange's CBOE Volatility Index, based on the S&P 500 index options, is quite popular in the US. Domestic bourses, too, have been lobbying with the market regulator to allow trading in India Vix.