Market Sell-Off: Sensex & Nifty Plummet 1% Each Amidst Weak Global Cues; India VIX Surges 14%

The Indian stock market witnessed a significant retreat today as both the benchmark indices, Sensex and Nifty 50, tumbled nearly 1%. This downward spiral was attributed to negative cues from global markets, particularly after a report unveiled a dip in US consumer sentiment to a six-month low, fueling short-term inflation concerns.

Investors are treading cautiously amidst pre-election anxieties, fuelled by a surge in the India VIX, which rose nearly 14% to 21 in early trade. Analysts foresee lingering market uncertainty until the election results are announced, highlighting the importance of a measured approach during these volatile times.

Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, shed light on the perplexity surrounding the aggressive Foreign Portfolio Investor (FPI) selling in May. Contrary to speculations linking it solely to the election outcomes, Dr Vijayakumar emphasized a shift in FPI stance from 'sell China, buy India' to 'sell India, buy China'. This change, driven by China's recent outperformance and India's relative underperformance, underscores a near-term trend rather than a fundamental shift in India's long-term prospects.

As of 10:15 am, the Sensex plummeted nearly 700 points to 71,985, while the Nifty 50 nosedived almost 200 points to 21,864. Market dynamics showcased 933 shares advancing, 2,189 declining, and 124 remaining unchanged.

The India Vix, often referred to as the Fear Gauge, has surged from a low of 10.2 on April 23 to approximately 21.06, marking its highest point this year. This spike, echoing levels last seen in October 2022, serves as a stark indicator of the apprehension gripping the markets.

A historical perspective sheds light on the significance of this volatility index, particularly during general elections. In 2019, amidst the elections held in April and May, the India Vix soared from 14.9 on March 8 to a peak of 28.08 on May 17. Following the victory of the Narendra Modi-led BJP, the Vix plummeted to a reassuring 12 by July of that year.

Similarly, during the 2014 general elections, the India Vix surged from 14.04 on February 21 to 37.71 on May 9, 2014, reflecting heightened market uncertainty during the electoral process.

The elections of April and May 2009, amid the backdrop of the Global Financial Crisis, witnessed the India Vix reaching an alarming high of 90 in October 2008, post the Lehman Brothers collapse. Despite stabilizing to 40 by February 2009, the Vix surged once again to 84.9 in May, signalling market unease with the election outcome. However, by May 29, 2009, the Vix had retreated to 40.

Market behaviour during elections underscores a disdain for uncertainty. However, the current Vix levels, while elevated, remain notably lower than those witnessed during the preceding three general elections, offering a semblance of reassurance amidst electoral turbulence.

This surge in volatility during elections resonates globally, with the US experiencing similar patterns. During the November 2020 presidential election, the CBOE Vix, the Fear Gauge for the US equity market, surged from around 25 in October to 38.5 in November, largely attributed to the tumultuous backdrop of the COVID-19 pandemic.

Contrastingly, during the November 2016 election, which saw the ascent of Donald Trump to power, the CBOE Vix rose from 13.75 in October to 16.5 in November, before retracting to 13.4 by December. This trajectory suggests that US investors perceive electoral outcomes, even amid unconventional shifts in leadership, as transient, with other market fundamentals exerting more substantial influence.

The global economic panorama further influenced market sentiments, with US indices grappling to gain traction amidst concerns of economic deceleration and persistent inflation. This struggle was accentuated by a climb in the 10-year US Treasury Yield from 4.45% to 4.50%. Additionally, Asian indices opened lower, driven by indications of sluggishness in China and news of US President Joe Biden's plans to hike tariffs on specific goods from the second-largest economy in the world.

Investor focus now shifts to the release of US Consumer Price Index (CPI) data scheduled for May 15. The CPI figures are anticipated to provide crucial insights into the trajectory of interest rates, guiding investment strategies in the days to come.