Volatility index India VIX slips to near one-year low; what it means for markets

The volatility gauge India VIX traded near a one-year low on Thursday, September 18, slipping to 9.49—its lowest level since October 24, 2024, when it had touched the 9.47 level. It finally settled at 9.89 level, declining 3.53%.

Over a year’s time the NSE's Volatility Index, or VIX, has tumbled 26%, while for six months’ time it has slipped 25%. It had touched a low of 8.18 level in 2023.

The volatility index is a measure of the market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices" and in finance often referred to as risk.

The index also indicates the expected short-term fluctuations in an underlying index. It is expressed as annualised volatility (in percentage terms, e.g., 20%) and is derived from the order book of the index’s options.

India VIX is a volatility index derived from NIFTY index option prices. It is calculated using the best bid-ask quotes of NIFTY options contracts to indicate the expected market volatility over the next 30 calendar days. The index follows the CBOE methodology, with modifications to suit the NIFTY options order book, including the use of cubic spline interpolation.

The fall in VIX, or fear gauge, indicates that the investors believe that the worst of the declines may be over.

The drop in VIX comes as the US Federal Reserve reduced interest rates by 25 basis points (bps) on Wednesday for the first time since December and indicated that more cuts would follow as the US economy continues to grapple with weak labour market conditions. The US central bank cut the interest rate to the 4-4.25% range.

A cut in the US Fed funds rate will make emerging markets such as India attractive for global investors, as they will likely move funds from the US treasury bonds to emerging markets, which are currently trading at attractive valuations, analysts said.

Meanwhile, the NSE NIFTY50 index has gained over 11% in the last six months. Shares of Eternal (55%), Hero MotoCorp (51%), Bharat Electronics (44%), Jio Financial Services (41%) and Eicher Motors (35%) have been the top contributors on the index during the period.