A sustained downtrend in fear gauge hints at upside ahead

Mumbai: A subdued Volatility Index, or India VIX, might be good news for equity investors. Whenever India’s VIX – a measure of traders’ perception of near-term risks to the market based on options prices – has remained in the range of 12-20, the Nifty has returned 20% on an average over the next one year. “Historically, when volatility has been in a downward trend for a prolonged period, Nifty has given better returns,” said Dipesh Dedhia, technical analyst at .

In the past, this trend was seen in 2014-15, 2017-19, and 2020-21 when volatility remained low. For instance, in 2014-15, the VIX was at 10-20 levels and the Nifty rose 28%.

So far in December, VIX has been trading at a daily average of 13.5, which is near the lower end of the band the index has traded in the past decade. The daily average level of VIX so far in 2022 is about 19.5. When VIX is low, it indicates that the risk perception is lower and traders see a lesser likelihood of a sharp fall in the market.

During the market fall of March-April 2020, triggered by the concerns over the onset of Covid infections, VIX has surged to 60-80 levels.

“We expect volatility upsides to be limited in 2023 and remain on the lower side,” said Dedhia.