INDIA VIX

What is India VIX?

India VIX, or the India Volatility Index, is a real-time market index that measures the expected volatility in the Indian equity market over the next 30 days. Introduced by the National Stock Exchange (NSE) in 2008, it is often referred to as the "fear gauge" because it reflects investor sentiment and market uncertainty. India VIX is calculated using the order book of Nifty option contracts, taking into account bids and asks for out-of-the-money options to estimate the market’s expectation of future volatility.

A high India VIX value indicates increased volatility and fear among investors, often due to economic uncertainty, global events, or significant market movements. Conversely, a low VIX suggests market stability and investor confidence. The index is widely tracked by traders, analysts, and institutional investors to gauge risk and adjust their trading strategies accordingly. While India VIX itself is not directly investable, it plays a crucial role in risk management, options pricing, and market forecasting.

How is India VIX value calculated?

India VIX is calculated using the Black-Scholes model, which derives implied volatility from the prices of Nifty options.

• The process involves analysing the order book of near- and next-month Nifty options, specifically out-of-the-money calls and puts.
• First, the best bid-ask prices for a wide range of strike prices are collected. The weighted average of these prices helps determine the volatility expected by the market.
• The calculation involves estimating the variance for each strike price, then aggregating these variances to obtain a single, annualised volatility percentage.
• This figure is then scaled down to reflect the expected volatility over the next 30 days, which is the time horizon of India VIX.
• The formula incorporates risk-free interest rates and time to expiry, ensuring a comprehensive measure of market expectations.
• The index updates in real time during market hours, capturing shifts in volatility as new information and market developments occur.
• By relying on actual market transactions, India VIX provides an objective and forward-looking measure of expected market fluctuations, making it an essential tool for derivatives pricing, risk assessment, and trading strategy formulation.

History of India VIX

India VIX was launched by the National Stock Exchange (NSE) in April 2008, in partnership with the Chicago Board Options Exchange (CBOE), which pioneered the original VIX for the US market. Its introduction was aimed at providing Indian market participants with a standardised measure of expected market volatility, similar to global practices. Since its inception, India VIX has become one of the most widely tracked volatility indices in the country. The index has evolved alongside the growth of the Indian derivatives market, gaining importance among traders, analysts, and institutional investors for risk management and market sentiment analysis. Today, it is an integral part of the Indian financial landscape.

Significance of India VIX on the stock market

India VIX plays a critical role in the Indian stock market by providing a quantifiable measure of expected volatility, which helps investors and traders assess risk levels. A rising VIX often signals growing uncertainty or fear, prompting market participants to hedge their portfolios or adopt defensive strategies. Conversely, a declining VIX reflects market stability and increased investor confidence. The index is used in pricing derivatives, developing trading strategies, and managing portfolio risk. It also serves as an early warning indicator of potential market turbulence, enabling both retail and institutional investors to make more informed investment decisions and adjust their exposure accordingly.