Liquidity will now flow into a larger pool and not flood the small little pond. Capital market regulator Sebi?s move to widen the derivatives market by adding seven more products is expected to do exactly that?widen the banks of the pond so that the water level remains relatively stable. At the moment, capital inflows into India have few places to go, and usually chase large cap stocks that boast of both liquidity and credibility. Most of the money is being channellised to these stocks, thereby raising valuations to bubble-like proportions.
Five years after the futures and options segment became operational, Sebi has accepted the Ram Mohan Panel?s interim report on derivatives in India. For this, the regulator should be commended. First cut reactions to the move suggest that some of these products would be very well accepted, especially mini contracts. MCX?s mini gold contracts, as an indication, have been quite popular with investors. Market experts reckon that these products could well see the doubling of their turnover from the current average trading range of around Rs 50,000 crore. The seven new derivative instruments also come at a time when the overall market has widened, too?if only just. Large companies are joining the exchanges at regular intervals, the real estate major DLF being a recent example. Reliance Power is all set for another large public issue, and a host of other mega issues are also lined up. This is an appropriate setting for sophisticated derivative products, as a wide choice of liquid assets makes for the smooth execution of trades and offers scope for sound hedging strategies. Mutual funds, meanwhile, are waiting in the wings to offer structured and quantitative products that work on rule-based investing principles and offer investors choice in terms of capital protection and superior growth. However, Sebi will have to make sure that all market constituents are educated well enough on the intricacies of derivatives and their usage. Insufficient knowledge of these could mean that people start using products that are much too sophisticated for them to make any money from. There are umpteen examples of even savvy investors getting so besotted by new tools that they err in their risk assessments. If derivatives begin to blow up in investors? faces, the resultant fear might have the entire effort come to naught.
