Futures Market in India Recent Developments

08/09/2022 0 By indiafreenotes

Equity derivatives market in India has registered an “explosive growth” and is expected to continue the same in the years to come. Introduced in 2000, financial derivatives market in India has shown a remarkable growth both in terms of volumes and numbers of traded contracts. NSE alone accounts for 99 percent of the derivatives trading in Indian markets. The introduction of derivatives has been well received by stock market players. Trading in derivatives gained popularity soon after its introduction.

The two major economic functions of a commodity futures market are price risk management and price discovery. Forward contracting in commodities is an important activity for any economy to meet food and raw material requirements, to facilitate storage as a profitable economic activity and also to manage supply and demand risk. Forward contracts, however, give rise to price risk; so there arises the need of price risk management. Price risk in forward contracts can be managed through futures contracts.

In due course, the turnover of the NSE derivatives market exceeded the turnover of the NSE cash market. For example, in 2008, the value of the NSE derivatives markets was Rs. 130, 90,477.75 Cr. whereas the value of the NSE cash markets was only Rs. 3,551,038 Cr. If we compare the trading figures of NSE and BSE, performance of BSE is not encouraging both in terms of volumes and numbers of contracts traded in all product categories

Among all the products traded on NSE in F& O segment, single stock futures also known as equity futures, are most popular in terms of volumes and number of contract traded, followed by index futures with turnover shares of 52 percent and 31 percent, respectively. In case of BSE, index futures outperform stock futures. An important feature of the derivative segment of NSE which may be observed the huge gap between average daily transactions of its derivatives segment and cash segment. In sharp contrast to NSE, the situation at BSE is just the opposite: its cash segment outperforms the derivatives segment as can be seen.

Despite of encouraging growth and developments, industry analyst feels that the derivatives market has not yet, realized its full potential in terms of growth & trading. Analysts points out that the equity derivative markets on the BSE and NSE has been limited to only four products- index futures, index options and individual stock futures and options, which in turn, are limited to certain select stocks only. Although recently NSE and BSE has added more products in their derivatives segment (Weekly Options, Currency futures, Mini Index etc.) but still it is far less than the depth and variety of products prevailing across many developed capital markets.