India VIX Jumps 39%

In a surprising twist, initial results indicating a narrow victory in the election led to a sharp decline in benchmark indices, increased volatility, and a rush of investors reducing their long positions on June 4. The Nifty dropped over 1,300 points, falling below 22,000, while the Sensex plunged more than 4,200 points to 72,250, with both indices losing nearly 5-6% in a single day. This represents the largest one-day drop since at least February 2022.

At the same time, volatility spiked as the India VIX soared nearly 40%, surpassing 29. This marks the largest increase in the volatility index in at least nine years.

Today's decline has caused the Nifty to break through crucial support levels at the 22,400-22,450 range, which it had maintained since May 17. It is also now staying below the short-term moving averages of 10-20 EMA, according to Sudeep Shah, DVP and Head of Technical and Derivative Research at SBI Securities.

“We believe the next crucial support for Nifty is around 22,150-22,170, where the 100 DMA is placed, a level not decisively breached since November 2023. Below 22,150, levels of 21,900-21,750 could be revisited, which were swing lows of March-April-May 2024,” said Shah.

On June 4, Nifty futures experienced significant long liquidation, with open interest dropping by over 4.5%, now totaling approximately 2 crore units in the June series. Following the early counting rounds revealing a fragmented mandate, substantial shorting was noted in PSU stocks, followed by Adani group entities, which plummeted by 15-20% with high trading volumes. This observation was highlighted by Arun Kumar Mantri, Founder of Mantri Finmart.

"Significant selling is clearly seen in the stocks that had experienced a good jump during the recent market rally over the past 1-2 weeks. Overall sentiment on the street has turned extremely negative, with support now placed at 21,650-21,800 levels and resistance around 22,800-23,000 levels on the higher side," said Mantri.

“The crucial level to watch from a reversal perspective would now be 22,600. Avoid bottom fishing and building any fresh positions at the current levels. Wait a few days for the selling pressure to subside and for further clarity to emerge,” said Shah. “With the VIX rising 40% today, it is expected to approach 34-36, which would further add to the pressure on the indices,” he added.

The exit polls and the actual counting results are showing a significant discrepancy, reflecting a tight competition. BSE-listed companies have seen a market-cap loss of nearly ₹40 lakh crore. The Sensex has dropped below 72,000, and the Nifty 50 has fallen below 21,200, both declining by around 7%. Consequently, the fear gauge index, the India VIX, is trading in the 29-30 range, up by over 39-44%.

“Uncertainty over the actual outcome of election results compared to exit polls is leading to panic amongst market participants. This has led to a rise in India VIX as demand for out-of-money options seems to be on the rise to hedge long positions and portfolios. 30-35 is the crucial range," said Ruchit Jain, Lead Research Analyst at 5paisa.

Apart from the COVID-19 correction, the India VIX exceeded the 30-35 range in May 2019 and February 2022. On March 13, 2020, the India VIX surged from 41.16 to 59.48, an increase of 44%. Market experts pointed out that the market is expected to remain volatile for some time due to the negative surprise in the election results.

All sectoral indices were trading in the red, experiencing the worst market decline in four years. PSU stocks were particularly hard-hit, with sectoral indices falling by nearly 15%. Among the top losers in the defense sector, BEL and HAL saw drops of more than 18%.