Why volatility gauge, India VIX, plunged 27% today, August 6? Details here

India VIX falls: The India VIX, a gauge of market volatility, dropped as much as 27 per cent to 14.87. The sharp decline was primarily driven by a robust recovery in the benchmark indices, Sensex and Nifty50.

The Nifty50 surged 1.35 per cent, adding 327 points to hit an intraday high of 24,382.60, while the BSE Sensex gained 1,100 points, or 1.38 per cent, hitting an intraday peak of 79,852.08.

According to Jigar S Patel, senior manager, technical research analyst at Anand Rathi, the recent VIX movement reflects a technical pattern known as the triple bottom around the 11-12 zone. This pattern often signals a potential trend reversal, especially when accompanied by a bullish divergence on the Relative Strength Index (RSI), indicating a possible bullish reversal. Following this, the India VIX saw a notable increase, reaching close to 20.

Patel indicates that in the short term, the India VIX is likely to find support around the 17-18 range, with this level potentially acting as a floor if the index declines further. Resistance is expected around 24, with a stronger barrier at 25, which may limit any upward movement. A daily close below 20 could indicate a temporary decrease in volatility and a potential cooling-off period. 

Thus, he forecasts that the India VIX will fluctuate within the 17-24 range in the near term, assuming no significant market changes occur.

Asian markets rebound

Asian markets saw a strong rebound, with the Nikkei and Topix indices each climbing 11 per cent after a previous 13 per cent drop. South Korea’s Kospi surged up to 5 per cent, while Australia's ASX200 rose by 0.3 per cent.

The recovery was supported by a rebound in US stock futures, with Nasdaq futures up over 2 per cent and the S&P 500 and Dow Jones gaining 1.54 per cent and 1 per cent, respectively. 

The rebound was partly attributed to a recovery in Japanese equities and the Yen carry trade. Additionally, US central bank officials reassured markets that weaker-than-expected July jobs data did not necessarily signal an imminent recession, although they indicated that rate cuts might be necessary to prevent further economic downturns. San Francisco Fed President Mary Daly noted that the job report's details suggested a slowdown but not a drastic collapse.

What happened on August 5?

The dramatic change in market sentiment comes after a tumultuous day on August 5, when the India VIX spiked by 61.66 per cent intraday to reach 23.15 amid a global market sell-off. 

The spike was driven by concerns over a potential US recession and a notable drop in the Nikkei and Topix indices, which had plummeted over 13 per cent the previous day.

On August 5, the BSE Sensex fell 2,686 points, or 3.3 per cent, to an intraday low of 78,296. The NSE Nifty50 also dropped below the 24,000-mark, hitting a low of 23,894, down 824 points or 3.3 per cent. 

At close, the Sensex settled at 78,768.42, down 2,223 points or 2.74 per cent, while the Nifty50 ended at 24,055, down 662 points or 2.68 per cent.

V K Vijayakumar, chief investment strategist at Geojit Financial Services, explained that the market's sharp decline was triggered by unexpected news and events affecting elevated market valuations globally. Concerns about a US recession, unwinding of the Yen carry trade, and geopolitical tensions contributed to the market turmoil. Despite the global sell-off, domestic investors supported the market, with Domestic Institutional Investors (DIIs) buying Rs 9,155 crores worth of shares while Foreign Institutional Investors (FIIs) sold Rs 10,073 crores in the cash market.

On the stock front, Vijayakumar noted that despite the broader market's volatility, quality large-cap stocks remained relatively stable. He advised against panic, suggesting that investors should consider gradually accumulating quality large-caps as fears of a US recession might be overstated. The overall correction in India was milder compared to other markets, and domestic liquidity flows could aid in market recovery.