India VIX unmasked: Friend or foe for Indian investors?

If there's the slightest change in the policy by any major economy like China, Germany or the U.S., there would be a corresponding change in the markets of other countries. And that's how a market works in the real financial world. A volatile market is always risky for a common investor if he or she's hastily investing in substantial sums. Before making any investment decision, an investor should be vary of the market volatility. This keeps the traders or investors in the race without getting their hands dirty.

In the Indian market, India VIX, also known as the India Volatility Index, is a gauging meter to measure the shifts and changes in the Indian markets. If you are a rookie investor, it's very certain that you must have stumbled upon this term. But what exactly is India VIX and why is it sparkling a lot of interest in the Indian markets among investors? Let's unmask and understand the theory behind India VIX in detail.

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What is India VIX?

Inspired by the idea of Robert E. Whaley, the one who developed VIX for the Chicago Board Options Exchange in 1993, the NSE (National Stock Exchange) took authorization from the Chicago Board Options Exchange (CBOE), and the license from Standard & Poor. India incorporated the VIX concept in 2003. This tool is a barometer that assesses the pulse of the market, aiding us in comprehending the comprehensive mood of the market and envisioning how the investors would reflect during the irregular price movements.

Also known as the Fear Index, India VIX tells investors about the expected price shifts in the future based on the current market fluctuations. This index further presents a forecast of the probable NIFTY 50 volatility in the next 30 days. If you are an equity investor, VIX would be highly helpful for your investment decisions. Since equity markets fluctuate frequently, resulting in short-term ups and downs in stock prices, this index would aid investors in determining and adjusting their investment strategies.

The higher the VIX, the higher the market volatility, and this is a sign to hold your horses before trading, as it would hamper the return on investment and pull the confidence of investors in the market. The lower the VIX, the lower the volatility in the market, which means the investors don't need to panic and be rest assured about their investments.

Levels of India VIX

If there's a surge in the VIX graph, the S&P 500 options traders contemplate higher market volatility, leading to fear and stress in the market. There are different levels of India VIX, and below is the breakdown:

1) Low VIX: If the volatility is between 0 to 12, then it indicates less or no fear or anxiety among investors and bullish market conditions.

2) Moderate VIX: The volatility ranges between 12 to 20, manifesting balanced fear and greed levels. During this period, the market is neither gloomy nor affirmative, however, stable and cautious.

3) Elevated VIX: The volatility scales between 20 to 30, signifying a spike in uncertainty and fear in the market. This phase happens when the market is dealing with some pressure or correction. Since there'll be rapid ups and downs in the market, traders can capitalize on this uncertain opportunity, take the right positions, and time the market to attain quick gains. Traders can use options to hedge against the downside risks and take advantage of short-term market fluctuations.

4) High VIX: If the volatility is between 30 and 50, then the market is in the high VIX stage. During this phase, the investors witness frequent market swings and corrections, leading to shifts in investments from equities to bonds, gold, or other safe-haven assets

5) Extreme VIX: The volatility goes beyond 50, where the investors exhibit extreme fear and stress. The market presents itself in extremely volatile conditions, experiencing incessant shifts in stock prices. The best example to help you comprehend this phase is the 2008 financial crisis or the great depression.

India VIX Prior and Post-Exit Polls

As we are closer to the final outcome of the general elections, Indians are feeling the heat and testing every area and option possible to get in the ballpark of market predictions. General elections are one of the biggest factors that turn the market upside-down, making investors feel topsy-turvy about their investment decisions. If the election results swing favourably, the VIX would come lower, boosting investors' confidence to trade and invest more, and vice-versa. As the outcome of the general elections came closer, the India VIX previous close was at 24.60 (9:15 AM), and hovering around the 20+ points range (till 14:41 PM).

India VIX: on June 3-Post Exit Polls Predictions (Credits: Google)

The GDP estimates also exhibited positively, touching 8.2 per cent in FY24 against the expected 8 per cent. Even the quarterly GDP values surpassed the expectations of less than 6 per cent, where Q3 stands at 8.6 per cent and Q4 at 7.5 per cent respectively. The NIFTY 50 was at 22,984.10 as of 28th May, 2024 (9:30 AM), and 23,143.80 as of June 3, 2024 (11:00 AM). The exit polls have projected a decisive victory for the Narendra Modi-led Bharatiya Janata Party (BJP) and the National Democratic Alliance (NDA) government in the 2024 Lok Sabha elections. On Monday, the Nifty 50 geared up by 800 points during intraday trading, reaching 23,300 points. The SENSEX is currently at 76,352.17, up by +2,390.86 rallying to hit the 77,000 mark. Can it touch 80,000 points post-outcome of the general elections? That's something we have to wait and watch until the results pop up tomorrow.

BSE Sensex on June 3- Post Exit Polls Predictions(Credits: Google)

However, experts suggest not investing based on the outcome of the exit polls, as this could only hamper the confidence of the investors if things go south. According to Axis My India,

Friend or Foe: Debate around India VIX

India VIX, a financial indicator, helps traders make investment decisions by projecting the market sentiments, and acts as a hedging tool. On the contrary, this gauging indicator cannot be very handy when the market volatility is extremely high. Any immediate global incident or unprecedented event, like COVID-19 or financial crisis, can change the market situation in a flash, resulting in the downfall of investors' confidence. Turbulent markets can propel traders to make hasty decisions, and even the hedges can go wrong, which leads to panic selling and huge losses. India VIX can come to the rescue for traders who deal with a lot of options trading, helping them leverage during abrupt market movements. Investors can use it to play the market field if used correctly. Amid general elections, the India VIX values have been floating between 16 to 25. During this period, if the investor buys VIX futures at INR 17, and sells it at 23, the gain would be more than 30 percent. So technically, investors can use India VIX to guard their underlying portfolio against probable slumps in the stock market.