India’s stock market is experiencing a bout of jitters, with the VIX (Volatility Index) mirroring a similar pattern seen before the 2019 election results. The VIX, often referred to as the ‘fear gauge’, has climbed above 20, signalling heightened volatility expectations among investors.
According to experts, this rise in market anxiety has echoes of 2019. Back then, the markets had peaked in March and the VIX shot up to 28.6 before the election results. However, there’s a key difference this time around.
In the lead-up to the 2019 polls, the VIX had been hovering between 20 and 14 for a period of six months, indicating a prolonged period of elevated volatility, said Anand James, chief market strategist at Geojit Financial Services.
In contrast, the current surge in the VIX has been much more rapid, he added.
“In stark contrast, VIX’s rise from record lows to above 20 now, has unfolded in just a fortnight’s time (two weeks),” James said.
While the historical comparison suggests the VIX could potentially climb further and thereby volatility, “the abruptness in the rate of change of the VIX may lead to a cool off, perhaps even before the electoral results,” he said.
What Is VIX?
The VIX, or Volatility Index, is a tool that tries to predict how stormy the market might get in the next 30 days. It’s kind of like a weather forecast for investors. A high VIX reading suggests investors expect rough seas ahead, with prices likely to fluctuate more. A low VIX suggests smoother sailing is expected.
VIX on Monday surged to a 52-week high of 21, which indicates high volatility in the markets. In May so far, the Sensex has also declined over 3,000 points or 4 per cent to 71,940 now, as compared with 74,981 on April 30.
Market analysts are divided on the implications of this volatility. Some believe the current anxieties are justified, given the upcoming elections and potential policy changes. Others point out that the rapid rise in the VIX might be a temporary overreaction, and a correction could be imminent.
Addressing the stock market concern, Home Minister and senior BJP leader Amit Shah in the latest interview with NDTV, on Monday said, “The market has fallen more in the past as well. Thus, linking market movements directly to elections, is not wise. Maybe the fall was due to some rumours. In my opinion, buy before June 4. The market is going to shoot up.”
He, however, showed confidence in his party returning to power for the third time in a row and said the Indian stock market will create new records on June 4. The results of the Lok Sabha elections, which are going on in seven phases, will be announced on June 4.
He said that due to different reasons, there are ups and downs in the stock market. “Please note my point, on June 4, this stock market will once again create new records.”
Shah explained why he was optimistic about where the Indian stocks markets were heading. “Whenever there is a steady government, markets do well. Modiji is coming back as the prime minister for the third time. Thus, my prediction.”
Implied Volatility & Lok Sabha Elections
Apart from VIX (Volatility Index), there is another gauge — Implied volatility. While the VIX reflects the expected volatility of the entire Indian stock market, the implied volatility is specific to a particular stock or option contract. It reflects the market’s perception of how volatile the price of that specific stock or option is likely to be in the future.
According to a recent Reuters report, the implied volatility of a put option with a strike price that is 10 per cent below the current level of the Nifty 50 Index was at 18-20 per cent on the National Stock Exchange.
At this time in 2019, the implied volatility was 28-30 per cent, suggesting an investor had to pay much more to protect against an unexpected outcome — a BJP loss — that year.
Implied volatility is a key variable in options pricing. A lower number indicates investors are relatively more confident about the outcome of an event.
“I think there’s a high level of confidence that there will be stability in the Prime Minister’s office post the results declaration,” Reuters quoted Vikas Pershad, Asian equities portfolio manager at M&G Investments, as saying.
“The depressed volatility … to an extent, reflects complacency about the results. This time, it’s the least event risk that we have felt in 20 years,” Pershad added.