The measure of volatility for the equity market - the India Vix - surged by up to 5 percent on June 23, but cooled off from highs, reflecting the jittery sentiment a day after US bombed Iran's three nuclear sites and threatened of more action if Iran did not choose to negotiate. US President Trump even mentioned about 'regime change' in Tehran, in a social media post.
However, this surge in the volatility gauge has still been relatively measured compared to a sharper spike in crude futures from the level seen early this month. The world oil markets are reflecting the risks to the sea trade lines of the Strait of Hormuz, a crucial channel for global crude shipments, with oil futures rising near $80 levels on fears of disruption if Iran chooses to block the channel or rebel militias supportive of Iran pose any risk to the ocean freight carriers.
Despite the threat of a spiralling of conflict in the middle east this month, the India Vix has still not crossed the highs seen on June 13, the day when Israel began military action on Iran's defence and nuclear infrastructure. On June 13, India Vix had closed at 15.08, after Israel directed its attack on Iran's air defence installations and missile sites, alleging Tehran's ambition to develop a nuclear weapon.
This year alone, the India Vix has had to contend with several shock events that have threatened to send the gauge higher amid risk-off sentiment, first after Trump's reciprocal tariff announcements on April 2, followed by India's military action - Op Sindoor - after the Pahalgam terror attack, and now the Iran-Israel war threatening to disrupt global oil trade. However, on a YTD basis, India Vix has been lower by 2 percent near the lower levels for the year, despite intermittent periods of surge, which have been followed by a quick cool off.
The surge in India Vix on June 23 has been accompanied by a sharp fall in equities, with the benchmark index Nifty 50 lower by close to a percent below 25,000, weighed down by IT and banking shares, along with businesses exposed to an oil shock.
Sunil Vaswani, ED, Container Shipping Lines Association (India) told CNBC-TV18 on June 22 that the situation does not necessarily translate into a great disadvantage for India, as Indian ships had already started to explore alternate routes to avoid the Red Sea after the Houthi crisis began to surface. If Iran decides to block the Strait of Hormuz, as the rhetoric from Tehran has indicated, the impact will affect everyone and not just India alone, with freight rates going up gradually.
Kotak AMC's Nilesh Shah said so far, the domestic factors have been influencing the market, but the geopolitical situation has been getting tense. While the initial reaction will be negative, investors should focus on domestic growth, which has been a big supportive factor, he added.
Read More: How Nifty's inverse relation with India VIX looked distorted during the March selloff
Shrikant Chouhan, Head Equity Research, Kotak Securities said last week that the range of the Nifty 50 index is expected to hold. "We believe, as long as the market is trading between 24,700 and 24,900, range-bound activity is likely to continue. On the higher side, a successful breakout above 24,900 could take the market to 25,000-25,050. On the other hand, breaking out of 24,700 could increase the selling pressure. Below this level, the market could retest the levels of 24,500–24,475." Chouhan said on June 20.
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