Rising hedging costs indicate growing distaste for India’s stock market

Investors are paying the highest since July 2024 to hedge against volatility in Indian stocks after years of domestic liquidity-fueled calm.

Implied volatility rose this month as the benchmark NSE Nifty 50 index joined the global sell-off due to the Iran war. But unlike other markets, the option price gauge for India is now much higher than the volatility experienced, indicating that traders are anticipating more volatility than in recent weeks.

Indian equities were particularly quiet in December as the India NSE Volatility Index hit a record low. While concerns ranging from a slowing economy to a shortage of artificial intelligence players began to weigh on the market, forcing foreigners to flee, a surge in domestic funding buffered the decline.

Then came the Middle East conflict which drove up oil prices. The Nifty 50 tanked 4.6% this month through the last close before rebounding 0.8% on Tuesday.

“Implied volatility is not rising for no reason – it’s the market’s insurance premium is rising,” said Maurya Ghelani, derivatives strategist at Kai Securities in Mumbai. “Investors are bracing for a regime change. The options market is clearly pricing in the risk that the calm will not last.”

Defense demand has picked up as investors grapple with India’s exposure to rising tensions in the Middle East. A government official said the nation is the world’s third-largest oil consumer and imports about 40% of its crude through the Strait of Hormuz.

The India VIX fell 3.6 points on Tuesday after ending Monday at its highest level since June 2024 – more than 14 points from a record low. Its ratio against the Cboe Volatility Index is the highest since last May. Meanwhile, the cost of hedging against a decline in the Nifty 50 over the next three months has also risen.

India’s $4.8 trillion equity market has for years enjoyed an inflow of mutual funds into stock funds through recurring monthly investment schemes, with domestic institutions driving the gains. Over the past five years, they poured $223 billion into Indian stocks, while foreign investors sold $11 billion. Sustained investment flows helped absorb the onslaught of foreign sales and dampen volatility.

While this trend has continued so far in 2026, most of the net buying by domestic funds was by foreigners in February. Now, the Iran war is adding a layer of uncertainty that is also affecting millions of retail traders who dabble in the market, according to proprietary derivatives trader Dinesh Nagpal.

“It had a domino effect that led to selling in all sectors,” he said, referring to the impact of higher oil prices. “This is a challenging period for retail as these investors saw margin calls that triggered portfolio sales to offset mark-to-market losses.”