Investment lull in equities still on

The Indian financial market turnover was Rs 594 lakh crore ($11.3 trillion) in 2011, up 33 per cent over 2010. The growth rate, however, fell from 77.7 per cent in 2010 and 44.3 per cent in 2009.

Equity derivatives still take away the lion’s share in total derivative volumes. Options have 40.7 per cent share, while stocks and index futures have 13.5 per cent. In absolute terms, futures’ volumes have come down from last year, while options grew 54 per cent.

The lull in investment in equity markets that had begun around the last quarter of 2007 escalated in 2011, with the cash market segment’s share in total turnover down to an all-time low of 1.2 per cent. Speculators’ dominance was at a peak in equities, grabbing 99 per cent market share through derivative products. Day trading has flourished even in the cash segment, as no one wants to take shares home and delivery-based volumes have come down drastically.
 

HOW THEY MOVED
	Turnover growth rate in financial markets

200920102011 Currency futures*2,136.66274.4515.35 Commodities futures44.1342.0670.19 Equity derivatives-futures-0.5413.62-16.27 Equity derivatives-options119.63119.4454.56 Equity cash-3.78-6.38-41.41 All Total44.3070.6933.27 *Trading in currency futures was introduced on August 22, 2008  

Market share (%)

Currency futures8.2018.0015.58 Commodities futures27.3522.7629.07 Equity derivatives-futures32.2921.5013.51 Equity derivatives-options27.2835.0740.67 Equity cash4.872.671.18 Total turnover (Rs cr)26,129,63544,599,59259,436,829 Compiled by BS Research Bureau

According to Ashima Goyal, professor, Indira Gandhi Institute of Development Research, “The STT (Securities Transaction Tax) impacts the spot equity market more than options, since tax is charged only on the premium for the latter category. STT for intra-day transactions is also much lower compared to delivery-based deals, attracting day trading. The lack of effective competition is also reducing innovation in the equity market.”

The turnover in commodities futures, headed by international commodities such as bullion-metals and crude oil, rose 70.2 per cent. Currency futures grew 15.4 per cent. Says Goyal, “The safe haven demand for gold, China demand, and the global liquidity effect all boosted commodities, while global uncertainty and volatility make currency futures attractive.”

Speculators remained cagey about the equity market. So, turnover in stocks and index futures declined 16.3 per cent. Nevertheless, speculators increased their exposure in index and stock options to protect value erosion on account of the large-scale volatility in global markets. The turnover of index and stock options jumped 54.6 per cent and their share in the total rose to 40.7 per cent from 35 per cent.

The year 2011 was challenging for the equity market due to macro uncertainties, local and global. The Sensex was down 22 per cent, as investor focus had been on persistent inflation and the Reserve Bank’s policy action. Trading activity was marked by strong volumes in the derivatives markets (at record levels in options), though cash turnover fell to a seven-year low, and, compared with percentage of market cap, was at its lowest level in history, according to a Morgan Stanley report.

Looking ahead
Goyal is optimistic about the improvement in equity derivatives in 2012. She said, “Since we may be at the bottom of the cycle, equities may become more attractive. Allowing pension and other long-term funds into equity markets would help, as would greater competition between exchanges, and reducing the level of the STT closer to transaction costs charged by exchanges and realigning it, so that it no longer favours options and intra-day transactions.”

The share of options in total derivatives trading climbed to 75 per cent from 62 per cent in 2010 and 46 per cent in 2009. Market breadth and depth were weak during the year, while hedging activity ascended to a decadal-high. Implied volatility picked up in the second half of the year.

Debt market derivatives are something the Indian market has been missing so far. Gaurav Arora, managing director, JayPee Capital, said, “Real growth in the derivatives market will come when debt derivatives like interest rates are traded successfully. Whichever exchange can do it successfully will benefit.” At present, there is no exchange-traded mechanism for hedging interest rate risks.

Interest rate futures were introduced but did not meet with success, as settlement was delivery-based. Cash-settled interest rate futures are allowed but are yet to be launched. Arora feels other segments will continue to grow at the current rate.

If the Forward Contracts (Regulation) Act is amended as the government has proposed, introduction of index futures and options in commodities will be possible, which will also add a lot of volume to commodities derivatives.