Experts Point to Changing Trading Dynamics Behind Unusual Market Behavior
Historical Correlation Breaks Between Nifty 50 and India VIX
The Indian stock market is witnessing an unusual trend where the traditionally inverse relationship between the Nifty 50 index and India VIX has seemingly broken down. As volatility spikes typically indicate rising uncertainty, the Nifty 50 tends to decline, and vice versa. However, since February 19, 2025, both indices have moved downward simultaneously, marking a significant deviation from historical norms.
Market Data Reveals a Shift in Trend
- Since February 19, the Nifty 50 has declined by approximately 3.5%, reflecting a broader market selloff.
- Surprisingly, India VIX, which usually rises when markets fall, has instead shed around 12%, suggesting a reduced perception of market risk.
- This anomaly has left traders and analysts puzzled, leading to speculation that structural changes in market trading patterns could be responsible.
Experts Weigh In: Changing Market Structure to Blame?
1. The Rise of Weekly Index Options
According to technical expert Dinesh Nagpal, India VIX might no longer be as reliable an indicator as before. He attributes this to a growing market preference for weekly index options rather than monthly contracts, which traditionally influenced VIX calculations.
“With traders now focusing on short-term weekly options, price fluctuations in monthly out-of-the-money (OTM) options have decreased. Since India VIX depends on these monthly options, it may no longer capture actual market volatility as effectively as before,” Nagpal explained.
2. Slower Market Downturn Affecting Volatility Metrics
Market analyst Preeti Chabra, Founder of Trade Delta, pointed out that the recent selloff has been unusually slow, further suppressing India VIX.
“A lack of sudden spikes in put option prices has contributed to a subdued VIX. In particular, in-the-money (ITM) put options are trading at a discount with little to no premium, while certain strike prices exhibit unusually high premiums. This erratic pricing behavior suggests an atypical market dynamic,” Chabra observed.
3. Market Sentiment and VIX’s Limited Role
Nirav Karkera, Head of Research at Fisdom, emphasized that while India VIX and Nifty 50 generally share an inverse relationship, their correlation is not absolute.
“There may be a causal link between the two, but it doesn’t always hold. In a market with mixed sentiment—where investors are neither overly fearful nor overly greedy—the relationship between Nifty 50 and India VIX may not play out as expected,” Karkera said.
What This Means for Traders and Investors
- Traditional risk indicators may no longer be as reliable: Investors relying on India VIX to gauge market risk should reconsider their strategies.
- A shift towards weekly options is reshaping volatility metrics: Short-term trading instruments are influencing market behavior differently than in the past.
- Caution is needed in interpreting volatility signals: The breakdown of the usual Nifty-VIX correlation suggests traders should use multiple indicators rather than relying solely on VIX for risk assessment.
A Changing Landscape for Market Volatility
The ongoing divergence between Nifty 50 and India VIX highlights a potential structural shift in the Indian stock market. As trading patterns evolve and new financial instruments gain prominence, traditional volatility indicators may need to be reassessed. Investors and traders must adapt to these changing dynamics to navigate the markets effectively.
