India’s Derivatives Market

Unprecedented Growth in Derivatives Trading

• India has become the world’s largest derivatives market, with:
  • $6.4 trillion notional turnover per day
  • Annual option premiums of $2.2 trillion in 2024
• The ratio of derivatives-to-cash market volumes in India is the highest globally.

SEBI’s Initial Measures (Effective from November 2024)

• Concerns: Overheated market activity and 90% loss rate among retail investors (SEBI study).
• Measures introduced:
  • Limit of one weekly expiry per exchange
  • Increase in minimum contract size
  • Upfront premium collection
  • Removal of calendar spread benefits on expiry days

Visible Impact of Measures

• Monthly expiries reduced from 20 to 8.
• Average premium per index option increased from ₹1,300 (Nov 2024) to ₹3,000 (Feb 2025).
• Share of zero-day-to-expiry options fell from 70% to 50% of volumes, and 40% to 20% of total premiums.
• Notional daily traded value of options dropped by 35% ($5 trillion to $3.2 trillion).
• Option premium turnover saw only a 15% decline, showing resilience in structured trading.
• Cash market volumes dropped by 12% (Feb vs. Nov 2024), aligning with derivatives moderation.
• In March 2025, derivative volumes rebounded by 20% month-on-month with improving market sentiment.

Current Derivative-to-Cash Market Ratios

• Option premium turnover to cash turnover ratio remains high at 0.54x (Feb 2025).
• On a notional basis, derivatives-to-cash volumes are still extremely high at 300x (down from 400x in Nov).

SEBI’s New Consultation Paper (February 2025)

• Proposed moves for orderly conduct and market stability:
  1. Delta-based (future equivalent) calculation for market-wide position limits for stock and index derivatives.
  2. Linking single stock derivative limits to underlying cash delivery volumes.
  3. Enhanced entity-wise derivative position limits, introducing intraday monitoring alongside end-of-day limits.
• Delta-based exposure monitoring is considered more accurate for price sensitivity and aligns with global regulatory standards.
• The new 15% free float-based limit is more liberal compared to the earlier 20% notional-based cap.
• Under this framework, the number of stocks falling under derivatives ban is projected to drop by 90% (from 366 to 27).

Intraday Limits and Safeguards

• End-of-day limit for individual entities: ₹500 crore (on a future-equivalent basis).
• Gross entity-wise limit: ₹1,500 crore.
• Intraday limits introduced to prevent market domination and sudden volatility caused by large players.
• SEBI is also pushing for diversified benchmarks to reduce the chance of index manipulation.

Retail Participation and Market Outlook

• Retail derivatives traders have grown from 700,000 to 3.7 million in five years.
• Despite regulatory tightening, India’s options market remains a key attraction for both global and domestic investors.
• Given its scale now surpasses the cash market, orderly growth and strict supervision are crucial for long-term equity market health.

India’s derivatives market has seen unpa