India VIX Index

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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