Since the country’s doors were opened to foreign investment, foreign institutional investors have been asking for a hedge. Many claim that its non-availability is restricting their exposure to India.International experience has shown that the launch of derivatives leads to a substantial improvement in market quality of the underlying equity market with a corresponding increase in liquidity and market efficiency.
With the launch of index futures, a certain delinking of roles of the two markets is obvious. The cash market will cater to relatively non-speculative orders, while the futures markets will take on the major brunt of price discovery.
Despite its vast benefits, it must not be forgotten that a derivative instrument is like a gun. Though a protective instrument, it could kill if misused.
The regulator has to be extremely cautious at the launch stage itself. Any slackening here could lead to a disaster which could destroy people’s trust in the system.