India VIX or the Fear Index as it is generally known, used to indicate "Fear of Highs" is at its all time low for Nifty.The reason that the VIX is so low because either everyone is bullish about the stock market or they are being ridiculously complacent about the downside risks. Maybe this is part of the story but there is a bit more to it - A low VIX could lead to lower premium on puts used to buy downward protection.
Generally, the VIX is supposed to be negatively correlated to the indices, but in the context of Indian markets, which are witnessing a structural bull phase, the relationship seems to have been lost. India VIX no longer can be used as a reliable tool to forecast market direction as can be seen from the following chart. The previous two highs in India VIX in September 2013 and May 2014 have been followed by fresh uptrend in Nifty. Similarly, the VIX bottom during March 2014 have resulted in fresh market breakout. So does the current all time low in India VIX indicating a fresh uptrend ??
The fact is that the VIX is not an "Fear Index " and never has been. It's a just a measure of options premium. As the markets go up, volatility increases and so does the risk premium as the investors and fund managers rush to insure the downward risk in their portfolios. However, as the market becomes stable at the higher levels, the fear of FALL recedes and VIX falls and so does the option premium. The VIX DOES NOT lead the equity market, it follows it.
