Market chatter suggests that the BJP could win fewer than 300 Lok Sabha seats.
Concerns over the margin of victory for the Narendra Modi-led Bharatiya Janata Party government are stoking volatility in the equity markets.
The India Vix (volatility index), a measure of expected swings in the market over the next 30 days, rose for a ninth straight day on Tuesday to end at 17, the highest close since January 30, 2023.
This is the longest gaining streak for the index since the pandemic outbreak in March 2020. Interestingly, the index, also known as the fear gauge, had finished at a record closing low of 10.2 just on April 23.
So what is fanning the fear among traders?
Market experts say the low voter turnout during the first two phases of elections has triggered speculation that the ruling coalition's seat tally would be lower than last time around.
During the 17th Lok Sabha election in 2019, the BJP secured an emphatic 303 seats and the National Democratic Alliance alliance over 350 seats, giving it the muscle power to carry out tough reforms.
"Information available through various sources and betting syndicates seems to indicate that the final result would not be as rosy as the BJP projected," U R Bhat, co-founder of Alphaniti Fintech said.
"That is why some are concerned that if the results are not up to their expectations, it will be difficult to implement the expected policy changes," Bhatt added.
"Since markets have been making new highs over the last several weeks," Bhatt explained, "some traders want to lighten their positions until the results are out, which is stoking the volatility."
Opinion polls ahead of the elections, which began on April 19, indicated the NDA could bag over 400 seats. Now the market chatter suggests that the BJP could win fewer than 300.
While the correction isn't sharp, the spike in the Vix suggests that the stocks could remain on a slippery slope and the volatility could spike further.
Besides the elections, the uncertainty around the rate-cut outlook by the US Federal Reserve is also keeping the markets under check.
"Given the growing international unpredictability and an ongoing general election in India, the volatility will probably continue until the general election outcome in 2024," believes Vaibhav Vidwani, equity research analyst, Bonanza Portfolio.
Santosh Meena, head of research at Swastika Investmart, said two factors are driving the Vix's rise.
"First, portfolio investors are buying protective put options to hedge their holdings. Second, traders are speculating on significant price movements post-election by purchasing both calls and put options," Meena said.
"This rise aligns with historical trends, as the Vix typically climbs before major events like general elections. In 2019, it saw a 150 per cent jump (from 12 to 30), and in 2014, it spiked 212 per cent (from 12.5 to 39). Based on this historical context, a further increase in the Vix is likely, with a potential move towards 25 before the election results," Meena added.
Anand James, chief market strategist at Geojit Financial Services, said the Vix and Nifty are positively correlated, particularly during large time frames, while the strength of the correlation can be low in the short term.
"Vix needs to sustain above 16 to elucidate higher fluctuations in option premiums," James said.
India Vix is a volatility index based on Nifty index option prices. From the best bid-ask prices of Nifty options contracts, a volatility figure (in percentage) is calculated which indicates the expected market volatility over the next 30 calendar days.
