Volatility, foreign inflows revive activity in India's derivatives market

By Savio Shetty 

Equity derivatives activity in India is gathering steam after a slump caused by regulatory curbs on speculative bets, as global investors and market swings make a comeback. 

 

The average daily notional turnover for futures and options climbed to ₹229 trillion ($2.7 trillion) in April on the National Stock Exchange, according to data on the bourse’s website. That’s the highest since November, when the Securities & Exchange Board of India imposed strict measures to rein in the frenzy in derivatives. 

 

Activity in the world’s biggest derivatives market has coincided with foreign funds returning to Indian equities, which are outperforming many markets hit by US trade tariffs. Increased volatility is driving derivatives activity, and volumes are likely to remain strong amid shifting trade policies and ongoing tensions with Pakistan. 

 

“You can’t keep speculators away for too long as volatility is a boon for options traders,” said Chandan Taparia, senior vice president and head of derivatives and technicals at Motilal Oswal Financial Services. “A combination of foreign funds returning and volatility will keep derivatives volumes higher.” 

 

The NSE Volatility Index hit its highest level since June after President Donald Trump announced his tariff plan April 2, breaking a period of calm. The gauge retraced slightly, but growing geopolitical tensions with Pakistan following a deadly attack in India-controlled Kashmir last month reignited the surge.  

 

Volumes can still taper off if volatility ebbs or global funds pull back. “Both are unlikely but possible,” said Maurya Ghelani, derivative strategist at Mumbai-based Kai Securities. “Also, turnover increases on rallies and generally falls on declines. So a prolonged selloff could hit volumes.” 

 

That’s pointing to a renewed interest in the segment. Premium turnover — the main driver of profits for exchanges and brokers — jumped 14 per cent on the NSE in April, while it jumped 25 per cent to a record on the BSE. The derivatives turnover on the Asia’s oldest stock exchange and NSE’s smaller rival surged to ₹139 trillion — the highest since September.  

 

Global funds bought Indian shares worth $1.3 billion in April, reversing outflows of as much as $3.2 billion earlier in the month. This boosted the turnover of GIFT Nifty derivative contracts, which hit a record high of over $100 billion in April. These contracts are traded on the NSEIX bourse located in GIFT City, India’s new international financial services hub in Gujarat.

 

The rebound can also be attributed to “factors, including traders adjusting strategies to longer-term products,” said Taparia of Motilal Oswal, referring to the regulator’s ban on short-term products such as those with one-week expiry.