India derivatives turnover slides in July as funding curb, higher taxes bite

The average daily turnover in India’s equity derivatives market has fallen by nearly a third in July so far, as the central bank’s funding restrictions took effect, although traders said the full impact will emerge only after existing financing arrangements expire.

Average daily futures and options turnover fell 27.1% to 1.7 trillion rupees ($17.65 billion), the lowest since November 2023, from June levels, exchange data showed on Thursday.

Index futures declined 37.2% from last month to 142.2 billion rupees, while index options average daily premium turnover slipped 23.5% to 418.23 billion rupees on the National Stock Exchange.

The Reserve Bank of India, effective July 1, barred banks from funding proprietary trading and required 100% collateral for other funding to brokers. The measure is the latest in a series of regulatory steps aimed at cooling the derivatives trading boom and protecting small investors.

Indian authorities have also reduced the number of weekly contracts, raised trading costs and increased taxes on equity derivatives since October 2024, citing concerns over retail investor losses.

Brokers said activity in July was hit by lower market volatility, the lack of bank-backed funding for intraday trading and the lingering impact of higher taxes on equity derivatives trading.

The average daily turnover in index futures on the NSE is on course for a fourth consecutive monthly drop since April, when the latest tax hikes came into effect. The overall average daily derivatives turnover has halved from its June 2024 peak.

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Ashish Nanda, chief digital business officer at Kotak Securities, said the full impact of the RBI norms will unfold over the coming year as existing bank guarantees expire.

Bank guarantees, which exchanges accept as collateral, remain valid for one year, and many proprietary traders secured them before the new rules came into force in July, brokers said.

About 1 trillion rupees worth of such guarantees were being used as collateral as of fiscal year-ending March 2026, data from an industry body showed.

Rajesh Baheti, managing director at Mumbai-based proprietary trading firm Crosseas Capital Services, said RBI’s measures have curtailed intraday overdraft facilities from banks used to fund trading positions.

He expects his firm’s volumes to drop by 25% by the end of 2026.

“It is going to be hard to find alternate sources of funding. There are non-bank lenders, but that would be expensive,” Baheti said.

Amit Majumdar, group chief strategy officer at Angel One, however, sees the impact as temporary and said the returns in Indian derivatives remain attractive.

“High-frequency trading firms and international trading houses may step in to acquire the volume gap left by domestic proprietary firms,” Majumdar said.