research paper on derivatives market in india

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DERIVATIVES MARKET IN INDIA: EVOLUTION, TRADING MECHANISM AND FUTURE PROSPECTS

The Indian derivative market has become multi-trillion dollar markets over the years. Marked with the ability to partially and fully transfer the risk by locking in assets prices, derivatives are gaining popularity among the investors. Since the economic reforms of 1991, maximum efforts have been made to boost the investors' confidence by making the trading process more users' friendly. Still, there are some issues in this market. So, the present paper is an attempt to study the evolution of Indian derivative market, trading mechanism in its various products and the future prospects of the Indian Derivative market. The present paper is descriptive in nature and based on the secondary data. Inspite of the growth in the derivative market, there are many issue (e.g., the lack of economies of scale, tax and legal bottlenecks, increased off-balance sheet exposure of Indian banks need for an independent regulator etc), which need to be immediately resolved to enhance the investors' confidence in the Indian derivative market.

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Derivatives play asignificant role in addressing the risk inborn in financial transactions. They can be used to hedge an existing market exposure (forwards), to obtain downside protection to an exposure even while retaining upside potential (options), to transform the nature of an exposure (swaps), and to obtain insurance against events such as default (credit derivatives). At the same time, derivatives involve incomprehension owning to the complexity of their valuation, design and risk implication. The Global Financial Crisis (2008) has spurned a large volume of literature laying much of the blame for the crisis on indiscriminate use of derivatives, pointing out the dangers integral to derivatives and emphasising the need for further regulation of the market. The OTC derivatives markets all over the world have shown tremendous growth in the recent years. OTC financial derivatives market in India has also grown, but by international standards the total size of the Indian OTC derivatives market still remains small. The origin of the Indian currency market can be traced to 1978 when banks were permitted to undertake intra-day trading in foreign exchange. The OTC derivatives in the form of foreign currency forward and foreign currency swaps contracts have been in existence for a long time. In January 1994, the RBI started permitting Indian banks to write " cross-currency " options including barrier options and other innovations. The deregulation of interest rates as a part of the financial liberalisation process created need for interest rate derivatives and the RBI responded by permitting interest rate swaps and forward rate agreements in 1999. The reporting platform for Credit Default Swaps (CDS) was put in place from the date of introduction of the instrument itself i.e. December 1, 2011.A good reporting system and a post-trade clearing and settlement system, through a centralised counter party, has ensured good surveillance of the systemic risk in the Indian OTC market.Firming up the position of the Clearing Corporation of India (CCIL) as the only centralised counterparty for Indian OTC derivatives market and better supervision of the off balance sheet business of financial institutions are two measures that confirm the stability of the market. This paper explores the Indian OTC financial derivatives market. It includes the study of evolution of the market, growth, supervision, regulation, reporting and clearing system and stability of the market. The present paper studiesOTC Forex, Interest Rate and Credit Derivatives market in India. It also traces issues and challenges for OTC financial derivatives market in India.

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