Knowing India VIX Index

I find myself in a lot of conversations about finance with my wife, a home maker. My chosen profession revolves around financial market and so is my chosen passion “writing on MarketExpress”. My wife allows our dinner conversation to veer towards my interests in finance more often. In one such conversation, I asked her about volatility index in India as we have VIX Index in USA. Surprisingly, she didn’t have any clue. I asked same question to some of my friends and acquaintances (many of them invest in stock market), but answers were still same. A lot of equity investors in India still don’t have even basic familiarity with India VIX.

When I queried my wife, friends and acquaintances about India VIX, I was mentally building framework for this article. Before going to India VIX,  let us first briefly understand about volatility Index. Volatility is often referred as the changes in prices and in finance often termed as risk. Volatility index basically measures market expectation of short term volatility. In other words, volatility index is a good indicator of the perception of investors on how volatile market would be in short term. During period of market volatility, market may move steeply up or down and as a result volatility Index (also referred as VIX Index) tends to rise. VIX, started by Chicago Board Options Exchange (CBOE), is a global trademark of volatility index. VIX measures implied volatility of S&P 500 index options.

Coming back to India VIX, it is a volatility Index introduced by National Stock Exchange (NSE) on the Nifty 50 index option prices. India VIX Index, calculated by NSE, shows expected market volatility over the next 30 calendar days just like original VIX. Higher the India VIX values, higher the expected volatility in market and vice versa. Investors or market participants can gather more information on VIX from NSE website.

Nifty 50 Index is an absolute number and signifies directional movement of the market. On the other hand, India VIX is a percentage value which indicates expected volatility in short term and how expected volatility is changing from time to time. Investors and other market participants can gauge expected market volatility through this index and use this information to make wise investment decision. Last four year average of India VIX Index is 24.1 whereas last one year average is 17.1. India VIX Index value of more than 24 may indicate fragile market conditions. Market may be considered extremely dangerous if India VIX Index crosses 50. Market may be expected to remain sideways if VIX Index goes below 10 or 12.

As we see in the chart, Nifty and India VIX Index has negative correlation. Correlation between Nifty and India VIX (both over 4 yrs and 1 year) is around -0.833, which makes it a good tool to hedge positions in Nifty. However, investors will have to wait for futures and options in India VIX to be started by NSE.

We also observe in the chart that India VIX Index started inching towards 17 and above from low of 13.3 when market started falling this year (Jan’13 onwards). The India VIX Index is more useful for market participants in derivatives markets (buying selling of futures and options contract).