With geopolitical risks easing, crude oil prices retreating sharply from recent highs, and the intensity of foreign capital outflows decreasing, the domestic market appears to be on a calmer, firmer footing.
India VIX, the volatility index, is now at a five-month low, which indicates the market is not expecting any major surprise in the near future.
With India’s economic growth outlook remaining robust, inflation risks easing, and investors scaling back bets on US Fed rate hikes, could a decline in volatility lure institutional investors?
India VIX remains on a downward spiral
The fear index dropped to a record low of 8.72 in January this year, signalling a sharp decline in perceived market risk. However, the Middle East Conflict, a sharp jump in crude oil prices, and the rupee’s weakness in the subsequent months drove the volatility index to a near two-year high of 28.91 in March.
From those elevated levels, India VIX began to cool as diplomatic efforts to de-escalate the Middle East conflict gathered pace and markets started pricing in the view that the worst of the geopolitical turmoil was behind. On a monthly basis, the volatility gauge has declined consistently since April.
On 7 July, India VIX dropped to 11.70 in intraday trade. This is the index’s lowest level since February this year.
Harshal Dasani, Business Head at INVAsset PMS, noted that the India VIX collapsing to a five-month low and roughly 60% below the March peak, is signalling three overlapping messages that need to be read together rather than in isolation.
“The first is that the expected 30-day realised volatility on the Nifty has compressed sharply as crude has softened back toward the $70 zone, Iran-US Doha talks are progressing, and the earnings season has not yet delivered a negative shock,” said Dasani.
“The second and more instructive read is that VIX below 12 has historically been a zone of elevated complacency rather than durable calm. Every meaningful Nifty correction over the past four years has been preceded by a VIX reading in the 10 to 12 band, followed by a rapid expansion, so the low print itself is not a green light; it is a risk-management prompt,” said Dasani.
“The third message is practical. Option premia are materially cheaper at these levels, which makes protective hedging via index puts more affordable than it has been through most of the calendar year,” Dasani said.
What could a decline in VIX mean for smart money?
As per experts, the normal range for India VIX is around 12 to 15. Historically, it has been seen that when the market has ample triggers to move both ways, though not necessarily with extreme volatility, the VIX tends to hover in the range of 12 to 15.
So, many experts believe the decline in India’s VIX below 12 indicates that market participants are pricing in near-term stability and low uncertainty.
“The risk barometer, India VIX, has cooled off significantly, declining from the recent high of 29 to around 12, primarily driven by the sharp correction in crude oil prices and stability in the currency market. This suggests that market participants have become increasingly comfortable with the near-term outlook and are not pricing in any major volatility at this stage,” Ajit Mishra, SVP- Research at Religare Broking, observed.
The recovery in both the benchmark indices and the broader market further reflects this improving sentiment.
However, it could be premature to assume that low volatility will attract institutional investors, as a lot will depend on the upcoming earnings season, the progress of the monsoon, and the US Fed’s monetary policy. The Middle East factor remains a wild card as the US and Iran are yet to finalise a lasting peace deal.
“Volatility could inch higher in the coming weeks as investors closely monitor the scheduled US-Iran peace talks and the onset of the corporate earnings season, both of which have the potential to influence market direction,” said Mishra.
FPIs have turned buyers of Indian equities this month. Till 6 July, FPIs bought Indian stocks worth ₹2,985 crore, as per NSDL data, as crude oil prices remain low and macro fundamentals improve.
Dasani said the stance the low VIX calls for is not one of adding aggressively into the record-high Nifty and Sensex, but of using the compressed premia to hedge existing exposure ahead of the three visible near-term catalysts, the Fed dot plot trajectory, the Q1 FY27 earnings season, and any re-escalation risk on the Strait of Hormuz.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
