With geopolitical risks easing, crude oil prices plunging from recent highs and foreign capital outflows easing, the domestic market appears to be on a calmer and stronger footing.
The Indian Volatility Index VIX is now at a five-month low, indicating that the market is not expecting any major surprises in the near future.
With India’s economic growth prospects remaining resilient, inflation risks easing and investors cutting bets on US Fed rate hikes, could lower volatility attract institutional investors?
Indian VIX remains on a downward spiral
The fear index fell to a record low of 8.72 in January this year, signaling a sharp decline in perceived market risk. However, conflict in the Middle East, a surge in crude oil prices and weakness in the rupee in subsequent months led to a near two-year high of 28.91 in March.
Following this elevated level, India’s VIX began to cool as diplomatic efforts to de-escalate the Middle East conflict gained momentum and markets began pricing in the belief that the worst of the geopolitical turmoil was behind us. On a monthly basis, the volatility indicator has declined consistently since April.
On July 7, India’s VIX fell to 11.70 in intraday trading. This is the lowest level of the index since February this year.
Harshal Dasani, head of business at INVAsset PMS, said India’s VIX falling to a five-month low and about 60% below its March peak signals three overlapping messages that should be read together rather than separately.
“Firstly, Nifty’s expected 30-day realized volatility has come down sharply as oil has retreated back to the $70 zone, Iran-US talks in Doha are progressing and earnings season is yet to bring a negative shock,” Dasani said.
“The second and more instructive implication is that VIX below 12 has historically been an area of increased complacency rather than prolonged calm. Every significant Nifty correction in the last four years has been preceded by a VIX reading in the 10 to 12 range followed by a rapid rise, so a low level in itself is not a green light; it is a risk management tip,” Dasani said.
“The third message is practical. Option premiums are substantially cheaper at these levels, making protective hedging through index puts more affordable than it has been for most of the calendar year,” Dasani said.
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What could a decline in the VIX mean for the smart money?
According to experts, the normal range for the Indian VIX is between 12 and 15. Historically, when the market has enough factors to move both ways, although not necessarily with extreme volatility, the VIX tends to fluctuate between 12 and 15.
Thus, many experts believe that the decline in Indian VIX below 12 indicates that market participants are looking for short-term stability and low uncertainty.
“India’s risk barometer VIX has cooled significantly, falling from a recent high of 29 to around 12, primarily due to sharp correction in crude oil prices and stability in the foreign exchange market. This suggests that market participants are becoming more comfortable with the short-term outlook and are not factoring in any major volatility at this stage,” noted Ajit Mishra, senior vice president, research at Religare Broking.
The recovery in both the major indices and the broader market also reflects improved sentiment.
However, it would be premature to assume that low volatility will attract institutional investors as much will depend on the upcoming earnings season, the development of the monsoon season and the US Federal Reserve’s monetary policy. The Middle East factor remains a wild card as the US and Iran have yet to reach a lasting peace agreement.
“Volatility could rise in the coming weeks as investors keep a close eye on the planned US-Iran peace talks and the start of corporate earnings season, which could potentially impact market direction,” Mishra said.
FPIs have turned into buyers of Indian equities this month. Until July 6, FPIs bought Indian shares worth ₹2,985 crore, according to NSDL data, as crude oil prices remain low and macroeconomic indicators improve.
Dasani said the position the low VIX calls for is not aggressive addition to record high Nifty and Sensex indices, but using compressed premiums to hedge existing risks ahead of the three visible near-term catalysts, the Fed’s dot plot trajectory, the FY2027 first-quarter earnings season and any risk of re-escalation in the Strait of Hormuz.
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