Characteristic of the index as it is so named the VIX (India Volatility Index) had a sharp rise in the past week. The volatility index has put doubts into the minds of stock market observers whether the India VIX Index rally is a signal of a rising tide against the BJP’s victory in the Lok Sabha elections. Some market observers believe that rising India VIX Index doesn’t mean a fear of BJP’s loss of majority but a lower than the claimed number of seats by the BJP and its allies.

It is pertinent to note however that the India VIX Index’s current movement is not unique to this election cycle. It can be recalled that the India VIX had surged to a high of 39.30 during the 2014 Lok Sabha elections and nearly touched the 30 mark during the 2019 Lok Sabha polls.

It may be helpful to understand what constitutes the index in the first place. The website clarifies “Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

Thus the VIX is an indicator of sentiment among the option markets participants and their positioning in anticipation of events. Should this be the only measure to understand market sentiments? While it may not be definitive one can take that as one of the indicators of market skittishness.

Focus on the long term

The host of events in the global geo political environment, continuing uncertainty regarding a “soft landing” in the US and worries of market valuation remains a continuing feature in markets globally.

Markets remain in this state for most of the times and periods of clarity and calm are few and far between. Expect markets to continue to fluctuate but do not lose focus on the long term. India continues to offer a great opportunity for long term investors in its equity markets however success will be determined by which investors remain steadfast in their asset allocation and refuse to be swayed by interim volatility as either defined by the VIX or otherwise and the investors who are swayed by interim volatility and events.

Mr. Tushar Pradhan
Chief mentor, Investment Strategy

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