Mumbai: A relief rally has swept Indian equities higher with the Nifty rebounding 3.5% in two straight trading sessions through Wednesday, driven by optimism around the de-escalation of the West Asia conflict and softening of crude prices. Yet, beneath the surface, the signal from the derivatives market is far less reassuring.

India’s Volatility Index or VIX – the Street’s fear barometer – has edged 7% lower in this period, a relatively modest move for sharp bursts in equities. On Wednesday, when the Nifty rose 1.7%, the VIX fell 0.4% to 24.64.

Under typical market conditions, such a rise in the benchmark index would see volatility compress more sharply as investors and traders unwind hedges and risk appetite improves. This time, the sticky VIX suggests investors and traders are keeping their hedges in place, unsure whether the current peace is temporary or a calm before another storm.

“The feeling that this bounce is merely a bear market technical rebound is reflected in elevated VIX levels,” said Prashant Shah, CEO, Definedge Securities. “Traders are in no hurry to cover their hedges or short positions because they are not sure if this is the bottom.”

India VIX reflects how volatile traders expect the market to be, based on Nifty options prices. When the mood is nervous, market participants buy more protection, particularly put options, which pushes up their premiums and thus pushes the VIX higher. When the undertone is confident, they reduce hedges, option demand falls, and the VIX usually drops. The average range for the VIX during calm periods is around 8-12 levels.

The VIX surged 42% in the past month against the 8.5% decline in the Nifty. In 2026, the fear gauge surged 76%, while the Nifty declined 10.9%.

The persistence of elevated volatility suggests that the market’s bounce has not altered sentiment meaningfully, reflecting caution around the durability of the move. “Investors are looking beyond the short-term market moves and trying to understand how higher crude prices for a longer period of time would impact inflation, interest rates and economies worldwide,” said Aditya Sood, co-founder, BTH Capital.

In the past, rallies of a similar or bigger magnitude have triggered sharper drops in the volatility index. The combination of a strong index rebound and only a modest easing in implied volatility places the latest swing in line with previous periods where confidence lagged price action, said analysts.