Context

India VIX, which is an indicator of the market’s expectation of volatility over the near term surged dramatically over the past 15 days.

About India VIX 

India VIX is a measure of the market’s expectation of volatility. It typically rises ahead of events like the Lok Sabha elections, which could have a major impact on the market trajectory. 

• The rise shows that fear among traders or market participants on the expected volatility is more now, as compared to 15 days earlier

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About India VIX Index

• Definition: The Volatility Index, VIX or the Fear Index, is a measure of the market’s expectation of volatility over the near term. 
  • Volatility is often described as the ‘rate and magnitude of changes in prices’ and in finance often referred to as risk.
• Calculation of Volatility Index: The Volatility Index is a measure of the amount by which an underlying index is expected to fluctuate in the near term, (calculated as annualized volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.
  • As volatility subsides, the Volatility Index declines.
• First Volatility Index: The Chicago Board of Options Exchange (CBOE) was the first to introduce the volatility index for the US markets in 1993 based on S&P 100 Index option prices.
  • Since its creation, it has become a measure of market volatility, guiding investors in making informed investment decisions.
• India VIX: India VIX is a volatility index computed by the NSE based on the order book of NIFTY Options. For this, the best bid-ask quotes of near and next-month NIFTY options contracts, which are traded on the F&O segment of NSE are used.
  • India VIX indicates the investor’s perception of the market’s volatility in the near term i.e. it depicts the expected market volatility over the next 30 calendar days.
  • The higher the India VIX values, the higher the expected volatility and vice versa, as per NSE.

Reasons for Surge in VIX

• Election Uncertainty: The ongoing Lok Sabha elections have created uncertainty, driving the India VIX higher. Historical trends show that significant domestic events like elections often lead to increased market volatility.
• Market Reactions: Recent market movements, including the BSE Sensex rising 998 points intraday before closing 112 points up, reflect the volatile environment.
• Foreign Investment Outflows: Heavy selling by foreign portfolio investors has exacerbated market volatility, contributing to the rise in India VIX.
• Geopolitical Factors: Factors like geopolitical tension in the Middle East and rising US Treasury yield are also playing their respective roles in fueling the volatility index.
• Sub-Par Quarterly Results of Small and Mid Cap space: The quarterly results till now have mostly been uninspiring, heightening investors’ nervousness about the valuations of mid and small-cap space. 

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