The Volatility of VIX Futures and Market Sentiment in a Post-Pandemic Era

In the wake of the pandemic, global markets have grappled with a new normal: persistent uncertainty, rapid shifts in investor sentiment, and the urgent need for robust risk management tools. For equity investors in emerging markets, the absence of a functional VIX futures market—particularly in India—has forced a reevaluation of strategies to navigate volatility. The National Stock Exchange's (NSE) delayed relaunch of India VIX futures, coupled with regulatory and structural hurdles, has left a void that investors must fill with alternative tools. This article examines how the NSE's product limitations are reshaping risk management in emerging markets and what this means for the future of volatility trading.

The VIX: A Benchmark for Market Sentiment

The CBOE Volatility Index (VIX) in the United States has long served as a barometer of investor fear and a cornerstone of risk management. Its ability to predict market downturns and act as a hedging tool is well-documented. For example, during the 2020 market crash, the VIX spiked to record levels, offering investors a critical mechanism to lock in protection. However, in emerging markets like India, the India VIX—a volatility index derived from Nifty 50 options—has historically underperformed. While the CBOE VIX can spike sharply during crises, the India VIX has remained relatively flat, even during major events like the 2020 lockdowns. This discrepancy underscores a critical challenge: the India VIX's limited responsiveness to market turbulence reduces its utility as a hedging instrument.

NSE's VIX Futures: A Reluctant Step Forward

The NSE's attempt to relaunch VIX futures in 2025 has been mired in delays and skepticism. The exchange, which dominates India's derivatives market, has faced regulatory scrutiny over unfair trading access and compliance issues. Meanwhile, market participants cite structural flaws in the proposed VIX futures, including a high contract size that deters small investors and a short expiry cycle (three weeks) that amplifies time decay. These design choices make the product less attractive for long-term hedging, a critical need in volatile emerging markets.

The NSE's caution is understandable. Sriram Krishnan, the exchange's CBDO, has emphasized the need for feedback from market participants before finalizing the product. Yet this delay has left investors with fewer tools to manage risk. Without VIX futures, the burden falls on alternatives like single stock options (SSOs), which offer granular but fragmented protection. The NSE's focus on compliance and product design, while prudent, risks prolonging a gap in the market's risk management arsenal.

Adapting to the Void: Strategies in a VIX-Deprived Market

In the absence of effective VIX futures, emerging market investors have turned to creative solutions. One approach is tail risk hedging using out-of-the-money options, which provide protection against extreme market drops at a relatively low cost. These strategies, however, require liquidity that many emerging markets lack. For instance, the India VIX's limited movement means that options based on it often trade with wide bid-ask spreads, reducing their effectiveness.

Another tactic is portfolio rebalancing. When volatility spikes, investors adjust allocations to maintain risk parity, selling overvalued assets and buying undervalued ones. This approach worked during the 2023-2025 period, when emerging market equities outperformed developed markets following VIX spikes. For example, the MSCI Emerging Market Index surged 18.4% after the April 2025 tariff announcements, as fear had already priced in the worst-case scenario.

Tax-loss harvesting has also gained traction. In taxable accounts, investors exploit market downturns to realize losses, offsetting gains and reducing tax liabilities. This strategy, while more relevant to U.S. investors, highlights the importance of liquidity and tax efficiency in volatility management.

The Cost of Delay: A Missed Opportunity

The NSE's hesitancy to relaunch VIX futures has broader implications. Emerging markets, already prone to sudden shocks, lack the depth and diversity of hedging instruments available in developed markets. The India VIX's weak inverse correlation with the Nifty 50 index further complicates matters. Unlike the U.S. VIX, which moves in lockstep with the S&P 500, the India VIX often lags, failing to capture real-time sentiment shifts. This delay forces investors to rely on backward-looking indicators like historical volatility, which are less effective in rapidly evolving markets.

Regulatory hurdles, meanwhile, add another layer of complexity. The NSE's pending approval from the Securities and Exchange Board of India (SEBI) for settlement applications related to unfair trading access has created uncertainty. Investors are left to wonder whether the exchange will prioritize product innovation or regulatory caution—a dilemma that could stall the VIX futures' launch for years.

The Path Forward: Innovation and Caution

For the NSE, the challenge lies in balancing innovation with prudence. The exchange must address structural flaws in the VIX futures design—such as contract size and expiry cycles—to make the product viable. A smaller contract size would lower margin requirements, encouraging broader participation. Extending expiry options beyond three weeks would reduce time decay's impact, making the product more attractive for long-term hedging.

Regulators, too, must act. SEBI's approval process should prioritize market readiness and investor education, ensuring that the product is both accessible and effective. A phased rollout, with pilot programs to test market response, could mitigate risks while building confidence.

For investors, the message is clear: adapt. Diversification remains key. Portfolios should include a mix of traditional and alternative assets, with a focus on companies with strong fundamentals that can weather macroeconomic shocks. Tail risk hedges, though imperfect, offer a safety net in uncertain times. And for those with a longer time horizon, the under-owned nature of emerging markets presents an opportunity—provided volatility is managed with discipline.

Conclusion

The NSE's VIX futures, while promising, remain a work in progress. Until the product addresses its structural and regulatory challenges, investors in emerging markets must rely on a patchwork of tools to manage volatility. This period of transition offers a chance to rethink risk management strategies, blending traditional methods with innovative approaches. As the post-pandemic era unfolds, the ability to navigate volatility will separate the resilient from the reactive. For the NSE and its stakeholders, the stakes have never been higher.