India VIX cools down to pre-Covid levels – here’s why and where it is headed

• India VIX represents how the investors perceive the markets to move in the next 30 days. Higher the VIX, higher the volatility and vice versa.
  
• In 2022, on an average, VIX is at 19.8, staying well below the 20 level during 7 out of 11 months so far, suggesting that the fear in the market is at a comfortable level.
  
• Experts Business Insider India spoke to highlighted two factors which will influence the volatility index in the next two months – Corporate earnings and budget
  
• Q3 earnings will start pouring in from January next year, while the Union Budget will be announced on February 1st.
  

India VIX, an index that measures volatility in the markets in the near-term, has cooled down just as India heads into the winter season. With cooling temperatures, investors too seem less stressed about the equity markets with VIX falling below pre-Covid levels.
“India VIX is moving at substantially lower levels in the last few months, factoring India being in a better position compared to other countries in terms of inflation and interest rates,” Arun Kejriwal, founder of Kejriwal Research & Investment Services told Business Insider India.

On an average, VIX shot up to over 27 points in 2020, the year of the Covid-19 pandemic. The biggest surge came in March 2020 when India entered the first nationwide lockdown – for instance VIX surged to 83 on March 24, a day after the lockdown was announced, which helped push the monthly average over 51. Not until December of that year did VIX fall below 20.

It is worth noting that these averages are on a monthly basis, so while there were major spikes in the first week of the lockdown, the overall average is lower since VIX was relatively lower in the days before the announcement.

Fast-forward to 2022. On an average, VIX is at 19.8, having stayed well below the 20 mark during 7 out of the 11 months so far, suggesting that the fear in the market is at a comfortable level.

“India VIX has cooled down to the lowest in two years at 13.8 levels (down -6%),” said Siddhartha Khemka, head - retail research at Motilal Oswal Financial Services.

“Currently investors know how the (US) Fed will react in the near future considering comfortable job, housing data that will help inflation to come down,” Shrikant Chouhan, head of equity research (retail) at Kotak Securities told Business Insider India.

Q3 earnings, budget could heat up VIX

While multiple factors influence the movement of VIX, experts Business Insider India spoke to highlighted two factors which will influence the volatility index in the next two months.

“Corporate earnings and budget expectations are two factors that will impact the volatility index in the near future,” said Chouhan.

Earnings for the quarter ending December will start pouring in from January next year, while the Union Budget will be announced on February 1st. “VIX will increase at the end of December or may be at the start of next year because market participants will start talking about quarterly earnings estimates,” Chouhan added.

Kejriwal highlighted the India Budget effect on VIX. “This budget is going to be very significant because of the last [full] budget of the current government, so anything that the government wants to do for people has to be in the coming budget. Ahead of the budget from January 15-30 I wouldn’t be surprised if VIX goes up sharply," he said.

Global factors like interest rate decisions, crude oil prices and supply chain issues could also impact investor sentiment.

Uncertainty and VIX

India VIX represents how the investors perceive the markets to move in the next 30 days. Higher the VIX, higher the volatility and vice versa.

"Volatility index movement depends on events that markets have to face in the near future. If those events are completely uncertain or because of which markets can turn violent in the range of 10%, in such a scenario we see VIX rising high,” Chouhan.

The calculation methodology includes the best bid and ask quotes of the near and next month Nifty options contracts. The detailed formula is available on the NSE website.

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