India’s options market is growing at the fastest pace in the world, helping restore investor confidence in a stock market yet to recover from a 52 per cent plunge during the global financial crisis.
Equity options traded on the National Stock Exchange of India Ltd. rose 36 per cent in the first half, the most among the 10 largest bourses, according to the World Federation of Exchanges. The BSE India Sensitive Index’s volatility has dropped below measures in Brazil, Russia and China to the lowest level since at least 1993, data compiled by Bloomberg show.
Foreigners bought a net $21 billion of local equities this year, pushing the Sensex up 26 per cent, the most of the so- called BRIC markets. While the increase in options reflects speculation by Indian investors, it also provides international money managers with the opportunity to hedge their bets. In 2008, when the crisis sparked a record plunge in the Sensex, options trading was 92 per cent below today’s level.
“Indian options have given sophisticated investors the flexibility to protect themselves from volatility and also profit from it,” Manoj Murlidharan Vayalar, the associate vice president of derivatives at India Infoline Ltd., said in a phone interview from Mumbai.
Options trading may grow at a 20 per cent annual pace during the next four years as Asia’s fifth-biggest equity market matures, said Rakesh Somani, the president of the Association of National Exchanges Members of India and a director at Eureka Stock & Share Broking Services Ltd., in a November 23 interview. Options give investors the right, without the obligation, to buy or sell assets at a fixed price by a specific date.
Options volumes began rising in 2008 after the government reduced taxes on the contracts. Trading on the NSE and BSE Ltd.’s bourse in Mumbai exploded to a notional value of about $468 billion in October, or about eight times the value of traded shares, data compiled by the WFE and Bloomberg show. In Brazil, the value of options was about twice that of stocks. A total 23.7 million equity options traded on the NSE in the first six months of 2012.
Average daily trading in options of Mumbai-based State Bank of India, the nation’s largest lender, climbed to about 74,000 contracts in November from 2,200 four years ago, according to data compiled by Bloomberg. Volumes for Bangalore-based Infosys Ltd., India’s second-largest software services exporter, increased to about 14,000 from 800.
Speculative trades: “Options are wonderful instruments as they add to the liquidity, functionality and trading choices,” Sunil Singhania, who helps oversee about $16 billion as the head of equities at Mumbai-based Reliance Capital Asset Management Ltd., India’s second-biggest mutual fund manager, said in an interview at his office on December 7. The growing market “attracts long-term money from both India and abroad.”
Options trading has hurt India’s capital markets by encouraging speculation instead of long-term equity investment, said Jignesh Shah, the vice chairman of MCX Stock Exchange Ltd., which plans to start trading stocks and equity derivatives next year.
The 30-day average value of shares traded on the NSE and BSE has dropped to the equivalent of about $2.4 billion from $4.6 billion three years ago, data compiled by Bloomberg show.
“Giving excessive focus on a single segment like derivatives and a few speculative products has caused great harm to the overall balance of Indian capital markets,” Shah said in an interview in Mumbai on Nov. 19. “The fundamental approach we have is to create an investment culture.”
Leveraged products : India’s stock market regulator prevented the creation of so-called mini-derivatives linked to the Nifty and Sensex indexes last month. The November 20 ban is meant to keep individuals from trading the securities, which have a smaller notional value than standard contracts, the Securities & Exchange Board of India said in the order. —Washington Post/ Bloomberg