Editorial. Don’t read too much into India VIX movement

India VIX, which captures the expectation of market participants regarding future volatility, has been receiving undue attention of late. The index has an inverse relation with the stock prices with an increase in the VIX denoting expectation of a market fall and a decline in VIX implying a future rally. With the Lok Sabha election and its results being the overarching theme these days, analysts have begun using the India VIX to predict the outcome of the ongoing polls.

The intense volatility in the market in recent weeks, with the India VIX moving close to 20 this week, the highest level in the last 22 months, is seen by many as an indication of a market crash soon, triggered by a possible adverse result at the hustings for the BJP. Such inferences are, however, stretched. The India VIX, modelled on the CBOE VIX, uses the prices that traders quote for Nifty50 option contracts to calculate the extent of annualised percentage change possible in the next 30 days. As the traders’ perception of risks in the market increases, they quote higher prices, thus making the index spike. The CBOE VIX is called the market’s fear gauge because of its tendency to spike sharply higher as market mood swings towards panic.

There are two reasons why the India VIX need not be taken too seriously. One, it is only a sentiment gauge and is not an indicator of any outcome. Two, the expectations of traders do not always come true. A SEBI study showed that 89 per cent of individual traders lose money on their trading calls. The share of the more sophisticated institutional investors who can take better informed decisions has been coming down in the equity derivatives section since the pandemic, with the share of retail investors currently around 35 per cent. Further, the movement of the India VIX since its launch shows that the index is not at an alarming level yet. The current level of 20 is far lower than the peak of over 80 touched in March 2020 and in November 2008. The index has typically traded between 10 and 20 over the past decade, and it continues to be within this range.

Spikes of similar magnitude were observed in the India VIX in 2014 and 2019 too, prior to the Lok Sabha election results. But the Nifty50 managed to notch strong gains in the subsequent months in both instances. The uncertainty around the election results appears to be leading to nervousness among traders this time, too. The sharp swings in stock market indices in recent weeks are also drawing a lot of attention. But such gyrations are par for the course as the stock market has been on a strong upward move since June 2022, making the Nifty50 gain 42 per cent in this period. With the relative valuations of Indian stocks appearing good, it is not surprising that domestic and foreign investors are taking some profit off the table.