Worst decline in five years for the VIX

The India VIX, a measure of market volatility, fell by about 20% on Tuesday, marking the largest one-day decline in the previous five years. Ahead of important occasions like the US Federal Reserve’s policy meeting and general elections, the plunge astounded market participants.

 

In the past, the reverse has occurred: significant events of this kind often cause the India VIX to drop sharply.

In all, the India VIX has dropped more than 15% in a single day on 14 separate times. Nine times out of these, the Nifty 50 had positive returns in the following month.

 

Tuesday’s closing fear level was 10.20, and it dropped as low as 9.86 intraday, the lowest level in five months. Alongside this, benchmark indexes increased for a third straight day as global tensions decreased. Both the Nifty and the Sensex closed at 22,368 points and 73,738.45 points, respectively, having gained 0.1% apiece.

When the India VIX is high, the market is generally anticipating more volatility, and when it is low, the market is anticipating less volatility.

The NSE calculates the India VIX volatility index using the order book of Nifty options contracts. It takes the best bid-ask quotations of Nifty options contracts that are traded in the F&O sector for the next and following month, according to the NSE.

Although statistics indicated that Nifty 50 has historically produced good returns in the month that follows an extreme drop in the India VIX, market players were split on the tendency this time.

Based on the market’s general structure, we think a consolidation or correction period may be approaching. Generally speaking, US bond rates have increased considerably since the likelihood of rate cuts this year has increasingly decreased, according to Sahaj Agrawal, Kotak Securities’ head of derivatives research. According to Agrawal, a bigger drop is unlikely unless there is ongoing global upheaval or a significant shift in the Fed’s stance on interest rate reductions.

According to some experts, the significant decline in VIX on Tuesday may have been caused by the likelihood that the governing party would get a sizable mandate.

The overall market structure is bullish, according to Axis Securities’ head of technical and derivatives Rajesh Palviya. He did admit, however, that a low Implied Volatility (IV) often suggests that the market may stay in a tight range in the near future.

When the results of the 2019 general election were announced in May 2019, the India VIX fell by around 30% in a single day. The Nifty 50 finished the month with a 0.4% increase. Similarly, India VIX had collapsed 34% after the 2014 elections. This came after the Nifty 50 had advances of about 5% in the previous month.

According to Nandish Shah, senior derivative analyst at HDFC Securities, investors should wait to see whether the India VIX maintains its current levels for the next three to four trading sessions before drawing any inferences from a single day’s move. He said that this can be seen as a sign of future decreased volatility.