The Indian Derivatives Market Revisited

Derivatives products provide certain important economic benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand. These functions of derivatives help in efficient capital allocation in the economy; at the same time their misuse also poses a threat to the stability of the financial sector and the overall economy. In the mid-1990s India started reviving the exchange traded commodity derivatives market and introduced a variety of instruments in the foreign exchange derivatives market, while exchange traded financial derivatives were intro-duced in 2001. Given India’s experience in informal derivatives trading, the exchange traded derivatives were quick to pick up substantial volumes. This paper presents accounts of the major developments in the Indian commodity, exchange rate and financial derivatives markets, and outlines the regulatory provisions that have been introduced to minimise misuse of derivatives. I