Investors are paying the highest hedging costs since July 2024 to protect against turbulence in Indian shares after years of domestic liquidity-fueled calm. Implied volatility has soared this month as the benchmark NSE Nifty 50 Index joined a global selloff sparked by the Iran war. Unlike other markets, the gauge of option prices for India is now much higher than realized volatility, indicating traders expect more turmoil than recent weeks suggest.

Indian equities had been particularly calm, with the India NSE Volatility Index reaching a record low in December. While concerns ranging from a slowing economy to the lack of artificial intelligence players had started to weigh on the market, pushing foreigners to flee, a gush of domestic funds had buffered the declines. Then came the Middle East conflict that sent oil prices surging. The Nifty 50 tanked 4.6% this month before rebounding 0.8% Tuesday.

India's $4.8 trillion equity market had enjoyed years of mutual fund flows into stock funds via recurring monthly investment plans, with local institutions becoming the force behind the gains. In the past five years, they poured $223 billion into Indian shares, while overseas investors sold $11 billion. The persistent inflows helped absorb bouts of foreign selling and dampen volatility. Now, the Iran war is adding a level of uncertainty that's also affecting the millions of retail traders who dabble in the market, according to Dinesh Nagpal, a proprietary derivatives trader.