Financial Derivatives Markets in India - Some Glaring Issues

The financial sector reforms in the decade of 1990's have transformed the Indian capital markets into a modern one that is vibrant and global. The year 2001 was special for the Indian capital markets as the derivatives segment was introduced. A derivative is a financial instrument, which derives its value from some other financial price. The most commonly used derivatives contracts are forwards, futures, options and swaps. With the introduction of the derivatives, the speculative trades have shifted to a more controlled environment with risk containment measures like margining, monitoring ad surveillance of the activities of various participants. Derivatives trading commenced in India in June 2000 after the SEBI granted the approval to this effect in May 2001. The stock exchanges NSE and BSE are permitted to deal in approved derivatives contracts. Derivatives are a useful tool of risk management. As a hedging mechanism, they reduce the risks ad help markets in absorbing the risk. In the recent years, there is distinctly significant growth in equity derivatives market in India. There are huge upward trends in the turnover of NSE segment. However, the trading volume in the BSE derivative segment has been decreasing since 2005. The present paper aims at reviewing the historical evolution of financial derivatives in India along with the recent trends in the derivatives segment.