India's Volatility Index Up 88% Amid Election Worries

Key Takeaway

• India's NSE Volatility Index surged 88% amid election concerns, marking an 11-day streak of gains due to fears over BJP's majority.
• Historical patterns show Indian market volatility spikes during elections, with current political uncertainty affecting investor sentiment.
• Despite global market stability, the cost of hedging in India is at a nine-year low, suggesting reduced protective investments amidst ongoing elections.

Election Uncertainty Fuels Volatility

The India NSE Volatility Index, a measure of expected market swings in the next 30 days, has seen an unprecedented 11-session streak of gains, highlighting the market's growing unease as India's general elections unfold. This surge, amounting to an 88% increase from April's low, reflects concerns over the potential for Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) to secure a smaller majority than initially anticipated. Analysts from Phillipcapital India Pvt., Anjali Verma and Navaneeth Vijayan, suggest that while a significant reduction in BJP's seats seems unlikely, even a slight underperformance could impact the government's reform agenda, particularly in infrastructure and global supply chain integration.

Market Dynamics Amidst Political Flux

Historically, election periods have been associated with increased volatility in Indian markets. The ongoing elections, conducted in seven phases for over half of the 543 parliamentary seats, have already influenced market behavior, reminiscent of the 2019 elections when the volatility index spiked by over 20% leading up to the vote count. This pattern underscores the sensitivity of financial markets to political developments, especially in a significant economy like India's, where policy reforms can have far-reaching implications for both domestic and international investors.

Hedging Costs at a Nine-Year Low

In a related development, the cost of hedging against a stock market downturn has dropped to its lowest in nine years, as indicated by the VVIX's recent close above 73. This decline suggests a current lack of investment in VIX call options, traditionally seen as a safeguard against market sell-offs. The S&P 500's stability, buoyed by strong corporate results and a potentially easing labor market, reflects a broader market optimism that may be contributing to the reduced demand for such protective measures. Christopher Jacobson of Susquehanna International Group points out the rarity of the VVIX operating below the ~80 level and hints at the possibility of opportunistic hedging in the near future, leveraging the low VIX/VVIX setup.

Street Views

• Anjali Verma and Navaneeth Vijayan, Phillipcapital India Pvt. (Neutral on the Indian general elections outcome):

  "We reckon that 400+ seats seem unlikely for the Bharatiya Janata Party-led alliance... The turnout so far is a tad lower and while this could affect the outcome for a few constituencies, it is unlikely to majorly dent the widely expected outcome of BJP returning to power."