India VIX jumps 68% in three weeks despite 7% rally in Sensex, Nifty

Mumbai has witnessed a significant surge in India VIX, an index gauging anticipated market volatility, amidst a positive trend for the benchmark Sensex and Nifty indices. The India VIX has skyrocketed by 68% over the last three weeks, reaching 17.5 as of Monday, from 10.5 on September 23. This rise, however, occurred while the Sensex and Nifty have gained over 7% during the same timeframe.

Contrasting the broader market's performance, the BSE MidCap 150 and BSE SmallCap 250 indices have declined by 3% and 4.6%, respectively.

The India VIX gauges the anticipated volatility of the stock market over the next 30 days. It typically rises when the market declines, as investors seek refuge from further losses. Yet, the relationship is not always inverse, as experts assert. A sharp rally can also bolster volatility if prices move faster than anticipated.

Rohit Srivastava, the founder of Strike Money and Indiacharts, explained that the VIX can reflect volatility in any direction. If the market surges faster than expected, the VIX may also rise. Short-covering in the derivatives market could also contribute to the India VIX's surge. Foreign investor short positions in Nifty futures have dwindled from approximately 280,000 contracts to nearly 106,000 contracts.

As short positions are covered, the premium in Nifty futures can escalate. Given that option prices are tied to the underlying futures price, this can sway option premiums and, consequently, the India VIX, stated Chandan Taparia, the head of technical and derivatives research at Motilal Oswal.