From 31.71 to 13.16: Stock market volatility index VIX corrected 58% in 6 sessions; what lies ahead?

India Volatility Index (India VIX), which calculates stock market volatility in India using the Nifty 50 index, has witnessed a sharp correction in the last one week following the 2024 Lok Sabha election results. NSE's India VIX index has declined as much as 58.5% in six sessions from its peak of 31.71 on June 4, when the general elections results were announced, to 13.16 during today’s session. During the same period, Indian benchmark indices BSE Sensex and NSE Nifty advanced 0.7%, recovering from a record fall registered on June 4, after vote-counting trends indicated that the final results were far disconnected from the exit polls and opinion poll numbers. This led to knee-jerk reaction in the market, dragging the Sensex and Nifty 50 by 6%, while India VIX jumped up by 24% in a single day.

Several market analysts have attributed this sudden drop in the volatility index to the outcome of the general elections, with NDA coming back to power under the leadership of Prime Minister Narendra Modi, signaling continuity in policies. With this, investors gain confidence in the political stability as well as the policy stability.

“Following the election verdict, India VIX has seen a significant decline from its peak of 31.71. This is a natural phenomenon as the VIX reflects market uncertainty, which tends to decrease after major events are resolved,” says Santosh Meena, Head of Research at Swastika Investmart Ltd.

Meena expects the VIX to hover around the 11-13 zone in the coming days, indicating a potentially calmer market environment. This could pave the way for a continued upward trend in the stock market, assuming other factors remain positive, he says.

Vishnu Kant Upadhyay, AVP - Research and Advisory, Master Capital Services also attributed the decline in the volatility index to the resolution of uncertainties following the election results.

Going ahead, Upadhyay recommended investors to remain cautious, citing that a sudden drop in VIX at elevated market levels may indicate potential profit-booking. He, however, adds that given the current trends and the political stability, it is reasonable to anticipate further deceleration in India VIX.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, says the decline in India VIX indicates that the days of heightened volatility are over and the market has entered a consolidation phase.

“From now on the focus will be on fundamentals and news flows. There is a recent trend of investors/ speculators chasing momentum stocks with low floating stock and excessive valuations. This is a risky trade which investors should avoid,” he says.

Vijayakumar says that investors should focus on fairly valued quality growth stocks. “Here, financials come on top. This segment has the potential to give decent returns in the medium to long term. IT stocks also have valuation comfort.”

Neeraj Chadawar, Head - Fundamental & Quantitative Research, Axis Securities, says historically there has been a noticeable decrease in the volatility index one month after the election results in the past three elections. A similar trend has been observed in the last five days after the most recent election results, he says.

“In the recent positive development, there were no major surprises in the ministry allocation of the Modi 3.0 government. This indicates a clear message to the market that the agenda of growth will continue to be a top priority. This development is likely to bring further confidence in political and policy stability going forward. It is expected that election-related volatility will also decrease,” adds Chadawar.

Going ahead, the U.S. inflation data and Fed policy decision as well as full-year budget remain critical for the market. The experts expect shift in positioning towards quality and low volatility stocks with some tilt towards defensive names.

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