India’s derivatives market for equity indices is growing. While the S&P CNX Nifty index of the National Stock Exchange (NSE) has hogged the limelight for nearly a decade, another index, the Bank Nifty, is gaining traction.
The index, which has 12 of the country’s top banks as its constituents and covers 86 per cent of market capitalisation of the banking sector, saw its average daily trading volumes shoot up to Rs 4,000 crore in June.
Till last year, the Nifty was the only large single financial product in India, with an ecosystem comprising exchange-traded funds (onshore and offshore), exchange-traded futures and options (at NSE, the Singapore Stock Exchange and Chicago Mercantile Exchange), other index funds and over-the-counter derivatives (mostly offshore).
- Till 2011, Nifty was the largest financial product in India
- Bank Nifty’s rise widens derivative market for indices and bring in more index and strategy-oriented funds
- MCX-SX’s plan to launch broader index with 100 stocks will increase competition
Now, after the Nifty and the Sensex, the Bank Nifty is the third-largest traded equity index. Aided by a market making scheme, the futures and options trading in the Sensex generate Rs 20,000-25,000 crore worth of volumes daily, in which the options segment has a 95 per cent market share. The Nifty index generates a little more than Rs 70,000 crore worth of volumes on an average day and the majority of volumes in both the Nifty and Bank Nifty are also generated through options trading.
According to market sources, the upcoming MCX Stock Exchange will launch its own broader index, with over 100 stocks, to compete with the Nifty and the Sensex.
Market players say the rise of the Bank Nifty as a key index derivative product has been on the back of high trading interest by foreign institutional investors (FIIs) and arbitrageurs. According to brokers, most FIIs want to trade in the Bank Nifty, as it allows them a higher leverage on the sector, with exposure to banks allowed only to a certain limit. Therefore, it is no surprise that the average daily open interest (OI) of the Bank Nifty has seen 64 per cent growth since January. During June, this OI was over Rs 4,100 crore. While in percentage terms, trading in the Bank Nifty is way behind the Nifty index, the fact that it has witnessed interest without any market making scheme shows there is high demand for index derivatives in India.
Globally, index-based trading strategies by large institutional players are in vogue and the trend is catching up in India. Stock and commodity exchanges in America and Europe have been engaging in creating index families that track various market sectors around the world. Donald Keith of FTSE, the leading UK-based index provider, feels this is mainly because the financial crisis accelerated the shift of both institutional and retail fund managers from active to passive investing. There is greater demand for transparency and simplicity, so dependence on an index to invest is increasing, as one can get more clarity, say experts.
Sundararaman R, senior vice-president and head of new products at NSE, said, “We expect volumes in the Bank Nifty to more-than-double from the current levels. On a three-year basis, the index has shown a CAGR of 35 per cent. We are engaging with investors and trying to understand their needs.” But, he would not divulge details of the products the exchange plans to launch.