Nifty 50 and Volatility Index Trends
Nifty 50 and the volatility index are shown in this chart sourced from DSP Netra. The orange line represents the total return index of Nifty 50, while the black line represents the VIX (volatility index) of NSE. The VIX measures market volatility, and typically, during major market crashes, we see sharp spikes in this index.
During the 2008 financial crisis, the VIX surged to 70, and in the 2020 COVID crash, it spiked to around 60-65. However, in the current market downturn, the VIX has remained largely unchanged, indicating a very smooth decline in prices.
Why Is This Fall Different?
Unlike previous crashes, where sudden panic led to massive volatility and margin issues for brokers, this decline has been more gradual over 4-5 months. The reason for this is the steady buying from domestic institutions and retail investors, which has cushioned the fall. There have been no major circuit-breakers or panic-driven trading halts, and both buyers and sellers have been able to operate smoothly.
Will a Volatility Spike Still Happen?
One lingering question is whether a sudden spike in volatility is still pending. Historically, major corrections have been accompanied by high volatility. While global markets currently don’t indicate any severe disruption, factors like a US recession, major geopolitical events, or worsening deflation in China could still create a volatility spike.
A Unique Market Correction
If this correction continues without a major volatility spike, it would be a rare event. Historically, such deep corrections have been accompanied by panic and sharp VIX movements, but this time, the orderly decline suggests that market participants are better prepared.
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