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The Indian stock market's fear gauge -- India VIX -- soared 16 per cent in the early morning deals on Monday, May 13, 2024, to hit 21.41-mark on the National Stock Exchange (NSE).
India VIX, or Volatility Index, which measures the market's expectation of volatility in the next 30 days, has been seeing wild swings over the past few days as investors try to pre-empt the number of seats that the ruling Bharatiya Janata Party (BJP) might win during the 2024 Lok Sabha elections.
"India VIX has surged above the critical threshold of 21, indicating heightened volatility. This trend aligns with the typical behavior of India VIX preceding major events. While a temporary easing may occur around the resistance point at 23, another uptick is likely before the announcement of the Lok Sabha election results," said Santosh Meena, head of research at Swastika Investmart.
According to market experts, if the final election outcome is not as rosy as what the markets had discounted, it will lead to policy uncertainty. Since markets have been making new highs over the last several weeks, some traders want to lighten their positions until the results are out, which is stoking the volatility, they said.
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What is India VIX?
India VIX is a measure of the market's expectation of volatility in the next 30 days. It is computed on the basis of the NIFTY Index Option prices.
The higher the reading, the higher is the expected volatility. On the contrary, a lower reading says option traders do not expect huge gyrations.
A reading of less than 20 for the VIX is still considered benign, but the rise is being seen as a sign that complacency is giving way to some anxiety.
India VIX during Lok Sabha elections 2024
India VIX has been rising consistently since late April, and has been trading at its highest level since October, 2022.
From its 52-week low level of 8.18, the index is up a staggering 161.7 per cent.
Analysts say markets had been pricing-in a decisive win by the BJP. However, lower voter turnout thus far during the Lok Sabha polling, has left investors worried about any negative surprises.
"VIX's behaviour now has a lot of similarity to the period shortly before the 2019 Lok Sabha electoral results announcement. Then too, markets had come off peaks in March, and VIX had shot up to 28.6. The main difference is that prior to the results back then, VIX was in a 20-14 range during the previous 6 months, pointing to volatility expectations being reasonably high for an extended period," said Anand James, chief market strategist, Geojit Financial Services.
However, in a stark contrast, VIX's rise from record lows to above 20 now, has unfolded in just a fortnight’s time.
"So, while recent history points to more room for upside in VIX, and thereby volatility, the abruptness in the rate of change of VIX, may lead to a cool off, perhaps even before the electoral results," he added.
"VIX's behaviour now has a lot of similarity to the period shortly before the 2019 Lok Sabha electoral results announcement. Then too, markets had come off peaks in March, and VIX had shot up to 28.6. The main difference is that prior to the results back then, VIX was in a 20-14 range during the previous 6 months, pointing to volatility expectations being reasonably high for an extended period," said Anand James, chief market strategist, Geojit Financial Services.
However, in a stark contrast, VIX's rise from record lows to above 20 now, has unfolded in just a fortnight’s time.
"So, while recent history points to more room for upside in VIX, and thereby volatility, the abruptness in the rate of change of VIX, may lead to a cool off, perhaps even before the electoral results," he added.
Opinion polls ahead of the elections, which began on April 19, indicated the NDA could bag over 400 seats. Now the market chatter suggests that the BJP could win fewer than 300.
By comparison, the BJP secured an emphatic 303 seats and the National Democratic Alliance (NDA) alliance over 350 seats during the 17th Lok Sabha (LS) election in 2019, giving it the muscle power to carry out tough reforms.
Other reasons for India VIX's jump
Analysts say the reduction of lot sizes of Nifty option contracts from 50 to 25 starting from the May expiry has likely increased liquidity and reduced the bid-ask spread of call and put options, which could have led to a fall in the fear gauge.
