Why did the volatility index India VIX fall 19.7% on April 23? Check here

India VIX, a gauge of volatility in the Indian stock markets, witnessed a sharp drop of over 17 per cent as soon as the market opened for trade on April 23, 2024. The index is currently trading very close to its all-time lows, data shows. 

As trade progressed, India VIX dropped lower at 10.33 levels, down 18.7 per cent in stock market trading on April 23. It finally ended 19.7 per cent lower at 10.2.

Such sharp falls in India VIX, analysts said, were last seen once the general election results were announced in the past. In 2014 and 2019, for instance, India VIX dropped by almost 34 per cent and 30 per cent, respectively on the day of results. The fall in India VIX in April 2024 is the biggest fall it has after these two falls back in 2014 and 2019. 

Source: SAMCO Securities

India VIX measures the market expectations of volatility over the near term. Volatility is often described as the rate and magnitude of changes in prices and often referred to as risk.

STOCK MARKET TRADING LIVE: Track all the April 23 market movement here

Typically, a high India VIX indicates that the market is expecting increased volatility, whereas a low India VIX suggests anticipation of low volatility.

Analysts believe that the sharp drop in India VIX on April 23, 2024 has been mostly on account of the positive sentiment, and that the markets are largely factoring in most of the global and domestic concerns at the current levels.

"The markets believe that the risk factors - geopolitical situation, concerns regarding March 2024 quarter (Q4-FY25) corporate earnings and the outcome of the Lok Sabha elections 2024 - are baked into the current stock prices. India VIX had started to trend up from 10.6 levels in April 2024 beginning. That said, now that the price-wise correction is over, the markets may see some time-wise correction / consolidation," said Ajit Mishra, senior vice-president for technical research at Religare Broking.

Theoretically, VIX depicts the volatility expectation for the next 30 calendar days. So, lower the VIX the more confident, the traders are about the ongoing upswing. Option traders, analysts said, also react to such scenarios by reducing expectation of premium expansion.

Source: SAMCO Securities

"But the suddenness of VIX’s fall on Aoril 23, especially when Nifty barely rose above 0.5 per cent, needs to be factored in when acting on the VIX’s signal. Also important to note that VIX is calculated on the basis of bid ask quotes of near as well as next month Nifty option contracts, and contracts expiring from April 26 onwards would be having a lot size of 25, half of what is in play now, which could have a role in bid asks getting tighter," said Anand James, chief market strategist at Geojit Financial Services.

Market outlook

The stock market, meanwhile, traded with positive bias on Tuesday, April 23 with the Sensex and the Nifty closing higher by 0.1 per cent. The midcap and the smallcap indices, however, outperformed with a rally of over 1 per cent each on the National Stock Exchange (NSE).

"The markets can retest their recent highs soon. There can be a few more days of consolidation, but the overall trend remains up. The Nifty has formed a 'dragging channel' pattern around the 22,900 mark. A breach of this level can take it higher to 23,400 - 23,500 levels in the next 45 days," Mishra added.

Analysts at ICICI Securities, too, share this optimism and suggest investors should not panic at the current levels. They expect the Nifty index to head towards an immediate milestone of 22,400. If it sustains above 22,400 levels, the Nifty, they believe, can challenge its high of 22,775 in coming months. Thus, 'buying the dips' would be the prudent strategy to adopt.

"Investors should not panic, rather continue to invest in good companies during episodes of volatility.  We reiterate our structurally positive stance, as we have seen in the past that once anxiety around such events (geopolitics, elections) settles down, markets tend to resume their primary up trend. The key support for Nifty is at 21,700 levels," they wrote in a recent note.