Market’s volatility gauge, India VIX, crashed nearly 20% on Tuesday, registering its biggest single-day fall in around five years. The fall stunned market participants as it came ahead of key events such as general elections and the US Federal Reserve’s policy meeting.
Historically, the opposite happens — a sharp fall in India VIX usually follows such major events.
Overall, there have been 14 occasions when India VIX fell over 15% in a single day. Of these, Nifty 50 gave positive returns in the following month on nine occasions.
A few factors could have led to Tuesday’s decline in India VIX, experts said. These include easing tensions in West Asia, expectations of a strong mandate to the ruling party in the ongoing Lok Sabha elections, and continued strength in the domestic macroeconomic environment.
The fear gauge closed at 10.20 on Tuesday, before hitting a five-month low of 9.86 intraday. This was accompanied by the benchmark indices rising for the third consecutive session amid easing geopolitical tensions. Nifty and Sensex gained 0.1% each to close at 22,368 points and 73,738.45 points, respectively.
Typically, a high India VIX indicates that the market is expecting increased volatility, whereas a low India VIX suggests anticipation of low volatility.
India VIX is a volatility index computed by NSE based on the order book of Nifty options contracts. As per the NSE, it takes the best bid-ask quotes of near and next-month Nifty options contracts which are traded in the F&O segment.
While data showed that Nifty 50 has mostly given positive returns in a month following such a sharp decline in India VIX in the past, market participants were divided about the trend this time.
“Looking at the overall structure of the market, we believe the market might enter a phase of consolidation/correction. Mainly, US bond yields have gone up significantly amid probability of rate cuts this year dimming gradually,” said Sahaj Agrawal, head of research, derivatives at Kotak Securities. Agrawal said a deeper correction is unlikely unless there is increased geopolitical unrest going ahead or a major unfavourable change by the Fed on the path of interest rates cuts
Other analysts said the prospects of the ruling party receiving a strong mandate could be a reason for the sharp fall in VIX on Tuesday.
Rajesh Palviya, head technical and derivatives at Axis Securities, said the overall market structure looks bullish. However, he acknowledged that low Implied Volatility (IV) generally indicates that the market may remain in narrow range in the near-term.
Amid the announcement of 2019 general election results in May 2019, India VIX had declined nearly 30% in a single day. In the following month, the Nifty 50 rose 0.4%. Similarly, post 2014 elections, India VIX had tanked 34%. This followed nearly 5% gains in Nifty 50 in the month ahead.
Nandish Shah, senior derivative analyst at HDFC Securities, said rather than making conclusions on a one-day move, investors should watch if India VIX sustains at lower levels in the next 3-4 sessions. That, he said, could be seen as an indication of lower volatility going ahead.
