So what are the possible causes?

One reason is the FIIs selling. According to the experts, the biggest reason behind the recent volatility in the Indian stock market is the strong selloff by foreign institutional investors (FIIs).

Based on the last 20 years data, it can be concluded that FII usually don’t buy before elections and prefer to invest only after the results are out, even if they have to buy costlier. As of now they are withdrawing their money. In just three trading sessions in May, FIIs have sold off Indian equities worth ₹982 crore, according to NSDL data.

Second reason is the Political uncertainty.

Market don’t prefer political volatility and there are both views. One view is that the present government is coming to power with thumping majority and the second is that the government coming to power with thin margins. The chances of government loosing are not seen but all these views have created uncertainty among investors and they refrain from investing.

Third is the Premium valuation of most of the stocks.  In this scenario of overvalued share prices, buying is not recommended and rather profit booking is taking place. The Indian market is at a premium valuation against its historical average. As per Motilal Oswal Financial Services, the Nifty 50 is trading at a 12-month forward P/E (price-to-earnings ratio) of 19.3 times, at a 5 per cent discount to its own long-period average (LPA).

Fourth is the unimpressive Q4 earnings of many companies. PMI for manufacturing has also eased than the previous month.

And the most important reason or effect is the rise in the volatility index or VIX which is spooking the investors. The India VIX, a volatility gauge often nicknamed the "fear index," has surged over 70% since its April 23rd when it was as low as at 10. Higher the VIX, higher is the volatility and lower is the Stock market.

This rise aligns with historical trends, as the VIX typically climbs before major events like general elections. In 2019, it saw a 150% jump (from 12 to 30), and in 2014, it increased 212% (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.

The India VIX index, has surged nearly 33 per cent in just four sessions in May so far, following a meagre 0.30 per cent rise in April and a significant 18 per cent fall in March.

In such situation what should be done? Adopt a balanced approach. Partially stay invested and at the same time hold some cash. If market falls further, add valuable stocks and boost your portfolio and if market rises again, then too you are at profit. It is not recommended to take extreme positions. Taking out your money or putting all in the stock market right now may be disasterous.

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