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Years after their introduction, derivatives markets in India have shown considerable growth in contracted volumes. Since pricing of derivatives is majorly done by arbitrage, the relationship between the spot price and future prices has helped improve the underlying equity market. Derivatives, as a part of a diversified investor portfolio, offer Liquidity and market efficiency. It helps increase savings and investment in the long run.
The NSE today accounts for more than 97 per cent of India's equity derivative market. In addition to the activity associated with expiration of contracts, derivatives' participants have indicated that retail participation has increased in the wake of buoyancy in equities. The leverage that derivatives offer (for instance, a contract value of a couple of lakh rupees require an initial payment of a few thousand rupees) is the key to attracting retail interest said brokers. THE aggregate turnover in the derivatives segment on the National Stock Exchange (NSE) was at an all-time high of Rs. 6,073.66 crores on Wednesday.
Problems
Though showing volumes, equity derivative market is not growing as fast as it should in terms of price discovery, the temporal spread of contracts and the range and diversity of contracts and instruments. The problems relating to the market are manifold: -
The India's financial system between market operators and regulators is too prone to political pressure and regulatory capture. This has sustained the market from opening further.
Low average per capita income, inadequate physical and institutional infrastructure, primitive public services and dysfunctional political and legal systems have made India lag behind many developed financial markets across the globe.
Uncertainty in Indian tax laws and rules whereby derivative transactions are treated as 'speculative' discourages active investor participation in the market.
Another problem which the investors face is the lack of proper training to deal in this market, where, unlike the cash market, certification is required.
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* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.
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