The curious case of the India Volatility Index

Is the missing indication of fear index a sign of over-confidence among investors, or have investors become complacent about risks going forward?

By Nasrin Sultana

Published: Mar 24, 2025 04:39:46 PM IST

Updated: Mar 25, 2025 03:16:28 PM IST

The India VIX has slipped 12.5 percent from the beginning of January and so has the benchmark index, shows a Forbes India analysis. Illustration: Chaitanya Dinesh Surpur

Even as stock markets have gone through a major correction with a widespread sell-off across sectors, the India volatility index (VIX) is not showing any sign of uncertainty, anxiety or fear. The India VIX, popularly known as fear gauge, has been slipping with the slide in broader markets instead, which is rare.

The India VIX has slipped 12.5 percent from the beginning of January and so has the benchmark index, shows a Forbes India analysis. In tandem, the Nifty also has lost nearly two percent in this year so far. Typically, the VIX and boarder indices have an inverse relation, especially in times of uncertainty-led panic sell-off in equities by investors. India VIX usually rises when there is panic or uncertainty in the market. However, in the last six months, despite the market falling significantly, VIX has remained low.

“This suggests that the correction has been more of a systematic and gradual decline rather than a sudden panic-driven sell-off,” says Somil Mehta, head---alternate research, capital market strategy, Mirae Asset Sharekhan.

Mehta explains that a low India VIX means that market participants are not expecting extreme volatility in the near term. It indicates that traders and investors believe the correction is more of a normal market cycle rather than a sign of deep financial distress. “Despite sectoral selloffs, the broader sentiment remains stable, suggesting confidence that markets will recover rather than crash further,” he adds.

The data analysis reveals correlation between the fear gauge and benchmark index rather than an inverse relation. For instance, from their respective highest points hit last year, so far both the index have fallen. The India VIX has cooled off around 60 percent from its highest levels of 31.7 hit on 4 June, 2024. Similarly, the 50-share index Nifty has also lost over 11 percent from its record closing high at 26216.05 on 26 September last year. Typically, a rise in VIX corresponds with a decline in stocks because traders and investors use it to hedge their equity positions and vice versa.

According to Aamar Deo Singh, senior VP research, Angel One, this instance of India VIX cooling off in times of a sharp fall in markets is a clear sign of confidence. “Overall, it has been remarkable that despite the benchmark indices correcting by over 15 percent over the past two quarters, and stocks across multi-cap correcting by over 40 to 50 percent in many cases, the fear index has refused to move higher. This clearly reflects the overall confidence in the Indian markets, as well as the maturity of the domestic market participants,” he says.

Singh explains that a low India VIX indicates that though the overall markets have seen a sharp correction and a significant erosion in wealth worth hundreds of billion dollars, the belief of investors towards positives in the medium-term and long-term remain intact. “With the Donald Trump 2.0 administration, as significant decisions such as tariff retaliations and provocative statements against countries continue to send jitters across global markets, Indian markets have managed to remain calm,” he adds.

What gives confidence to Singh is that India markets have been amongst the least performing markets in the past six months but Indian investors continue to remain unperturbed as of now. “Only a Black Swan event either in the US or India, would lead to a significant spike in India VIX,” says Singh.

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Is India VIX Losing Significance?

The VIX index is the most closely watched by traders as a measure of the expected volatility of stock markets over an ensuing 30-day period and is traders’ main way of protecting against or betting on sharp moves in stocks. Investors, research analysts and portfolio managers look to VIX values as a way to measure market risk, fear and stress before they take investment decisions.

At current levels, India’s VIX continues be below its four-year average of 15.1 times, while that of the US remains above its average of 19.1 times.

So, can a low divergence between India VIX and benchmark index mean that that fear gauge is misleading now. “India VIX is extremely important and valuable indicator, but its behaviour has changed over time due to factors like increased institutional participation, options-based hedging strategies, and algo trading," says Mehta.

In the past, a sharp fall in markets would immediately lead to a spike in VIX. However, now, markets seem to be absorbing selloffs more gradually. So, while VIX remains relevant, it should be used alongside other indicators rather than in isolation, he says.

However, Mehta agrees that low VIX can sometimes be misleading. It might indicate that investors are complacent and not expecting a major downside, but this could change quickly if unexpected negative news emerges. In such cases, VIX could spike suddenly. However, as of now, the low VIX suggests that investors are not pricing in extreme risk.

According to Singh, assuming India VIX has lost significance would be too early and premature, since fear, greed and hope have been the driving forces for markets. “It’s just that the current situation and scenario has not lead to any panic like outcome despite a significant wealth destruction happening over the past six months, clearly indicates that markets are not at the very least, expecting any major untoward incident anytime in the near future.”

Historical performance of India VIX in past two specific occasions- the US sub-prime crisis and during Covid-led worldwide lockdowns India VIX spiked to record levels, crossing the 90 levels. Since then, it has cooled off as both global and Indian markets, have witnessed a spectacular bull market.

In this month so far, the India VIX has further cooled off over 9 percent while the Nifty has jumped around four percent.

Markets: Volatility Ahead

Led by some positive sentiment fuelled by the US Federal Reserve not cutting interest rates and perhaps some bottom fishing in India, markets have regained in March. However, volatility may still pinch investors, feel experts.

Key factors like corporate earnings, rupee depreciation, global market trends, and policy decisions are what market investors are watching out before dipping their hands in any stocks for buying.

“Market outlook remains positive. The possible triggers in short-to-medium term outlook for the positive trend to continue would be if inflation remains under control, allowing for a favourable interest rate environment, foreign institutional investors (FIIs) return to buying mode while domestic consumption and GDP see growth,” Mehta says.

FIIs have been on a selling spree for few months now. In March alone so far, they have dumped stocks worth $2.26 billion while being a net seller of $16.03 billion from January this year. In contrast, domestic institutional investors (DIIs) are still buying Indian stocks. They have bought stocks worth Rs30.788 crore in March and net Rs1.79 trillion in 2025 so far.

Agrees Singh that the markets are expected to remain volatile. “It would be too early to say that Indian markets have bottomed out as two key factors need a closer watch, first, the US and India’s GDP growth and inflation data, and second, the expectations of revival of domestic corporate earnings. Any major negative trend in either, could act as triggers to push the markets lower,” Singh says.