Once a Fear Gauge, Now a Mere Number? India’s VIX Faces Doubts

India Vix: It’s not patience but sentiment that’s really being tested in this market slump.

For investors, pinpointing exact factors impacting the future movement of the market is becoming increasingly difficult, thanks to heightened uncertainty owing to Trump's tariff call, turbulent macros and foreign capital outflow. But what’s now making the outlook tougher to calculate for investors is the distortion of the inverse relationship between India’s volatility gauge, VIX and the market performance.

So far this year, benchmark indices— Sensex and Nifty—have plummeted by around 6%. Broader markets have declined by nearly 10%, with nearly all sectors trading in red. At the same time, India's volatility index, Vix continued to hover around the 13-level mark, despite the correction.

Usually, market downtrends are viewed as fear periods where panic takes the better of investor sentiment. High sell-offs and liquidity dry-ups give rise to anticipations of increased volatility. Historically, Vix and the stock market have always witnessed an inverse relationship, until now.

While the recent anomaly has raised doubts in the minds of D-street players, market analysts attribute the current distortion to a structural shift in the market.

Market Dips, But VIX Stays Calm

Even if we take CBOE's (volatility gauge of the US market) movement this year so far, the index has surged by over 32% despite a limited broader market correction. The S&P 500 index has declined by just over 1.54 during the same period.

Just last year, Nifty Vix saw a sharp surge of over 25% in just a single day when the election results came out. Markets crashed over 5% that day.

Keeping in view the current movement, some analysts point out that markets have gone through a structural shift in the past months. "The growing influence of algorithmic and passive trading strategies have dampened volatility responses, potentially altering traditional VIX dynamics," said Narinder Wadhwa, managing director and CEO of SKI Capital Services. In algo-trading, the execution of trades is based on predetermined conditions which might help in preventing extreme fear-driven movements. As for passive trading, investors are often little concerned about short-term market fluctuations, reducing the urgency to cover and thus limiting volatility.

Analysts also believe that the current correction witnessed by investors is relatively low as compared to past stock market downtrends. This has kept realised volatility, which reflects past market moves rather than future expectations, relatively low.

India VIX, derived from the Nifty options contract, represents the market’s expected volatility over the next 30 days, explained Om Mehra, technical analyst, SAMCO Securities. "there is a disconnect between realised and implied volatility—as the market moves steadily, realised volatility remains low, even if implied volatility stays slightly elevated due to event-risk pricing. The presence of high open interest in both calls and puts has also created a balanced market, preventing extreme volatility swings," he said.

Markets Getting Tough to Read

Even as FII outflow remained strong, domestic investors (DIIs) seemed to provide some kind of support to the market. However, this coupled with the lower participation of big institutional investors has kept price movements irregular and difficult to read.

“With high US interest rates and global uncertainties, FIIs have reduced their investments in Indian markets. Although Domestic Institutional Investors (DIIs) provide some stability, weaker foreign fund flows have resulted in choppy price movements and lower market liquidity, making volatility trends harder to interpret,” said Hardik Matalia, derivative analyst at Choice Broking. This means that VIX alone may not be enough to judge market sentiment accurately, he further added.

As per market analysts, while these deviations cast doubt on the VIX's reliability as a fear gauge, no single indicator can fully capture market complexities. The recent movement of the volatility gauge acts as a reminder for investors to not rely on one single indicator for understanding market sentiment.

Rather than losing relevance, VIX is adapting to evolving market conditions, making it essential to interpret alongside other indicators like Put-Call Ratio (PCR), Mehra said.

"Traders should not rely on VIX alone but also track open interest data, options skew, and sector-specific trends to get a clearer market picture," said Matalia.