Indian Markets: Is the election volatility over?

Elections or Union budget outcome does not have any meaningful correlation with Nifty 50 price change in the long term.

The Nifty 50 fell by 6% in a single day on June 4 as the election results were not in line with the market expectations. However, Nifty 50 has now crossed the pre-election level as Narendra Modi was sworn in as India’s prime minister and BJP-led coalition government has taken charge.

Market activity spiked up significantly on the election result day as reported by leading brokers because investor concerns regarding the coalition government created a short lived panic.

FinSharpe analysed trends to understand the impact of volatility around elections.

Elections or Union budget outcome does not have any meaningful correlation with Nifty 50 price change in the long term. However, volatility significantly fluctuates in the short term.

As the saying goes: Buy the rumour, sell the news. It is evident that the fear levels in the market shoot up significantly before such events and take a dip after, almost always overreacting in the short term.

How can investors measure this fear? The India VIX is a gauge to understand the fear or volatility in the market. A higher value indicates more fear in the market and a lower level indicates more stability.

India VIX or volatility index is basically the markets expectation of volatility measured by using the order book of the underlying index options.

Historically, volatility in the market goes up significantly one month before the result date and reduces after results are announced.

On June 4, 2024: India VIX shot up to 26.75

As of June 14, 2024: India VIX closed at 12.82

This is a sharp decrease in a short span. Historically, the trend of market overreaction to news continues to create volatility in the short term. Investors should stick to their asset allocation during such times.

Looks like the election-related impact has now fizzled out and the market is back on its trajectory eyeing key events like: Monsoon Reports, Corporate Earnings, Union Budget, US Fed rate and US elections.

As Benjamin Graham says: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”