NSE, India's largest exchange, has seen its derivatives business hit hard by the central bank's stricter funding rules.
These stricter funding requirements raise the cost of bank guarantees and reduce the leverage available to domestic trading firms. While the central bank's goal is to lower risk for lenders, the rule raises funding costs and leaves trading firms with less capacity to execute deals.
The central bank's policy is only one reason for the slide. "The decline in index futures and options volumes is clearly a result of the RBI circular and recent geopolitical uncertainty," Bathini said. "We need to wait at least another quarter to assess its full impact."
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Calmer markets have also reduced the need for hedging. NSE's volatility gauge declined for a fourth consecutive month while the NSE Nifty 50 Index rose. With fewer sharp swings, investors often see less reason to buy index options for protection, and that weakens overall derivatives volumes.
At listed peer BSE Ltd., average daily notional turnover rose 8.4% in July to 232 trillion rupees. The premium-based picture was weaker: average daily premium turnover fell 18% to 502 billion rupees at NSE and slipped 3.1% to 254 billion rupees at BSE. Notional turnover counts the nominal value of contracts traded, while premium turnover shows how much option buyers actually paid. That makes premium data a useful signal for demand.
The latest figures add to a wider cooling in India's derivatives market. The market had expanded rapidly before regulators stepped in to restrain speculative behavior. Over the past two years, SEBI has increased minimum contract sizes, imposed stricter position limits, and introduced other protections aimed at reducing participation by retail investors in options. These measures were designed to curb excessive speculation and limit heavy losses among less experienced traders.
RBI's latest collateral directive adds a further constraint to the financing behind derivatives trades. By requiring cash to make up a larger share of bank-guarantee backing, the central bank curbs leverage among local trading firms. That forces firms to lock up more capital and makes margin funding costlier, reinforcing the cooling trend already set in motion by market conditions and SEBI's earlier steps. The cash-collateral rule is meant to shield banks from the risk of uncovered guarantees during market stress, but for trading firms it means more capital must be set aside for the same positions.
NSE is preparing a share sale likely to rank among the country's largest. Even with the drop in derivatives volumes, NSE remains the largest exchange in the world for these products and posted a jump in quarterly profit last week.
The NSE Nifty 50 Index rose 1.60% to 24,774.30 on the day.
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