Volatility Index's Five-Month Low Indicates Range-Bound Nifty In Near-Term

India VIX, the benchmark gauge of volatility in the Indian stock markets, tumbled 20%, indicating that market participants expect stock indices to remain range-bound in the near term despite the ongoing general election and earnings season.

The index plummeted below 10 for the first time in five months, marking the largest intraday drop since Feb. 24, 2023. This is in contrast to the overall tendency of the Indian market, which often experiences an increase in volatility during the period preceding the general election.

India VIX, based on the Nifty 50's option prices, indicates the perception of market volatility in the near term. A higher value indicates a greater expectation of volatility, and vice versa.

This sharp decline in volatility can be attributed to a sense of security rather than complacency in the markets, according to Rajesh Palviya, senior vice president of research and head of technical and derivatives at Axis Securities.

"The (India VIX) index can be taken as a measure of fear in the markets, which remains low as investors expect incumbency as a result of the general elections," he said.

Aditya Agarwal, head of derivatives and technicals at Sanctum Wealth, attributes the fall in VIX to a decline in put option premiums without a corresponding rise in call option premiums.

The declining premium for put options implies that there are fewer people in the market who expect a downward trend in the near term, he said.

"While volatility remains in the markets on an intraday basis, it is not reflected in the VIX since the absolute returns are relatively consistent," Agarwal said.

"Since the VIX takes into consideration the contracts for the current month as well as the next one, and this month's contracts are set to expire only a couple of days ahead, the markets are not anticipating big moves by the immediate expiry," he said.

However, given that the results of most index heavyweights are already out, market participants may expect little impact on the index even if earnings surprises arise.

The results for the major IT stocks have already been released, no specific expectations from HDFC Bank's results, and Reliance Industries' results largely in line, investors appear confident in Nifty's near-term trajectory, according to Amit Goel, derivatives analyst at Amit Ventures.

The four times when India VIX fell more than 20% intraday, Nifty 50 gave a muted return in the months that followed.

Agarwal expects the India VIX to rise above 11–11.5 levels after the contracts for the current month have expired, and the VIX rolls forward the June series in its calculations.

While Palviya of Axis Securities expects the market to remain range-bound with stock-specific momentum to continue.

However a period of profit booking remains a possibility as a result of the continued positive sentiment, he said. "Though it is likely to be short-lived."