India VIX near historical lows: What does it indicate for investors?

Market

Deepak Jasani, Head of Retail Research at HDFC Securities

India VIX refers to the India Volatility Index. It measures the amount of volatility that traders expect over the next thirty days in the Nifty. It is also called the Fear Index since a higher level of VIX represents a high level of fear in the market and a low level of VIX indicates a high level of confidence in the markets.

A lower VIX signifies low volatility and a stable range for the asset price. India VIX at a multi-year low is good for the bulls, as India VIX has a negative correlation with Nifty. In general, Lower India VIX = Lower Risk of Falling.

India VIX is currently placed just below 11, which is near historical lows. Lower VIX could mean that the market is not expecting any significant risk in the short term due to any big event scheduled ahead. Uncertainties like Russia Ukraine War, the US Inflation, rate hikes, etc, are already factored in. The Indian market has become more stable and predictable in the short term. Except for IT sector, the quarterly results of most large-cap companies have been good so far, which gives confidence to investors to accumulate stocks for the medium to long term.

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The sharp swings in equities and the revival of fixed income in the wake of rising interest rates had discouraged individual investors from participating in the equity market in the recent past. Till March 2023, making money was difficult due to uncertainty about rising interest rates and possible recession in the major economies like US and Europe.

Since October 2021, the Indian market has gone nowhere and has not generated meaningful alpha for retail investors and traders. The massive fall of Adani group stocks in February restrained traders and investors from enlarging their commitments in Indian equity markets.

However, from April 2023, Indian markets have recovered sharply, making most retail investors suffer from FOMO (The fear of missing out). The big question that comes to the mind of an investor is whether the recent uptrend in the Indian market is a long-term trend reversal or it is just a pullback. Most investors might have doubts about the sustainability of the markets at higher levels given the high interest rates/inflation persisting. Investors could be waiting for the interest rate trend to reverse from up to down.

In today’s world, every investor and trader seeks ways to make their stock trading and investing activity as smooth and successful as possible. Knowing very well that the volatility of prices plays a key role in stock performance, VIX can be used effectively by investors to make estimates about the levels of stocks and formulate their techniques to trade accordingly.

India VIX can also be used as a contrarian indicator due to its mean reversion nature. In other words, it oscillates in the range. It wouldn't keep falling perpetually or rising perpetually.

When the VIX gives an indication of rising volatility, investors can increase their hedges in the form of Puts to play the market both ways. Options traders can go for the long straddle or long strangle kind of strategies as options are available at much cheaper levels due to lower VIX levels. On the other hand, very high VIX levels could indicate topping out of markets.

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