64

Management Insight

INDIAN FUTURES MARKET : AN ANALYSIS

Agha Nuruzzaman*

ABSTRACT
The Indian governments efforts are directed towards the establishment of a free, fair, transparent and fully informed
market with help of the Futures market, so that futures prices are truly determined by the forces of demand and supply.
In the long term, the continuing rapid growth of economy in India creates a huge potential for Futures market. This
study is an effort to understand the factors under PEST Analysis. For this purpose, data from different sources were
collected and later analyzed by using statistical techniques. With an improving agriculture, widening scope of education,
a balanced economy, friendlier infrastructure, vividly sketched out laws unstained by any kind of corruption will create
the right climate for swift growth of the futures market. The PEST analysis shows that most of the factors considered are
indeed going in favour of Indias futures market.

INTRODUCTION
A futures contract is a legally binding
agreement to buy or sell a commodity or
financial instrument sometime in the future at a
price agreed upon at the time of the trade.
While actual physical delivery of the
underlying assets seldom takes place, futures
contracts are nonetheless standardized
according to delivery specifications, including
the quality, quantity, and time and location.
The only variable is price, which is discovered
through the trading process. In this study we
are trying to find out the opportunities and
challenges of futures trading in India through
PEST analysis.
One of the key benefits of trading in the
futures markets is that it offers the trader
financial leverage, which is the ability of a trader
to control large Dollar/Rupee amounts of a
commodity with a comparatively small
amount of capital. As such, leverage magnifies
both gains and losses in the futures market.
Another key benefit of futures trading is
liquidity, which is a characteristic of a market to

absorb large transactions without a substantial

change in the price. Liquid markets easily
match a buyer with a seller, enabling traders to
quickly transact their business at a fair price.
Most of the futures markets are considered to
be transparent because the order flow is open
and fair. Everyone has an equal opportunity for
the trade. When an order enters the
marketplace, the order fills at the best price for
the customer, regardless of the size of the order.
With the advent of electronic trading,
transparency has reached new heights as all
transactions can be viewed online in real time.
In a very general sense, transparency makes all
market participants equal in terms of market
access. While making an investment, it is
important to have confidence that the person
on the other end of the trade will acknowledge
and accept the transaction. Futures markets
give traders this confidence through a clearing
service provider system that guarantees the
integrity of their trades. The brokerage charges
are also very low when compared to trading in
equities.

* Research Scholar, Department Business Administration, Aligarh Muslim University, Aligarh, Uttar Pradesh
Vol. VII, No. 2; Dec., 2011
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Indian Futures Market : An Analysis

With lots of opportunities, there are some

risks involved in futures trading (figure-1).
Primarily among them is Price Risks, the risk of
losses due to change in market prices. Price risk
can increase further due to Market Liquidity
Risk, which arises when large positions in
individual instruments or exposures reach
more than a certain percentage of the market,
instrument or issue. Such a large position could
be potentially illiquid and not be capable of
being replaced or hedged out at the current
market value and as a result may be assumed to
carry extra risk. Counterparty Risks is the risk of
loss due to a default of the Counterparty in
honouring its commitment in a transaction
(Credit Risk). If the Counterparty is situated in
another country, this also involves Country
Risk, which is the risk of the Counterparty not
honouring its commitment because of the
restrictions imposed by the government.
Dealing Risk is the sum total of all unsettled
transactions due for all dates in future. If the
Counterparty goes bankrupt on any day, all
unsettled transactions would have to be redone

65

in the market at the current rates. The loss

would be the difference between the original
contract rate and the current rates. Dealing risk
is therefore limited to only the movement in the
prices and is measured as a percentage of the
total exposure. Settlement risk is the risk of
Counterparty defaulting on the day of the
settlement. The risk in this case would be 100%
of the exposure if the corporate gives value
before receiving value from the Counterparty.
In addition the transaction would have to be
redone at the current market rates. Operational
risk is the risk that the organization may be
exposed to financial loss either through human
error,
misjudgment,
negligence
and
malpractice.
Apart from the above mentioned
opportunities and challenges, futures market
are also impacted with lots of other reasons like
political, economical, social and technological
factors of the country, Which may be studied in
a systematic way using an innovative tool
called PEST analysis.

Figure-1: Risk Involved in Futures Market

Source: Developed by the Researcher/ Data collected from different source

PEST Analysis: A conceptual framework
PEST Analysis is a simple, useful and
widely-used tool that helps to understand the
big picture of Political, Economic, SocioCultural and Technological environment that
Vol. VII, No. 2; Dec., 2011
Art_07

influence any industry. Such factors are usually

beyond the companys control but can often
influence the company. These factors always
present themselves either as opportunities or
threats to an industry.

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Management Insight

Figure 2: PEST Analysis in Diagrammatic Format

Source: Developed by the Researcher/ Data collected from different source

As with any investment, the general
economic condition of the country plays an
important role in establishing the futures
market sentiment. A booming economy is the
basis for expectation of price rise. Futures
traders may opt to go long in a flourishing
economy to make profits when prices rise in
future. Political stability or uncertainty can
have a major impact on futures prices as these
directly affect the economy of the country. The
growth prospects for a particular sector of the
economy should also be a consideration before
making an investment in futures. Index and
single stock futures are influenced by many of
the same factors as the delivery based stock
market. High interest rates, changes in taxation
policies, market sentiment, GDP growth etc
affect the prices of these futures. SSFs move
largely in line with the current price movement
of that stock in the market, with some premium
or discount based on the expected direction
that the stock price will move in.

Studies in the Indian market find that

volatility of the underlying market declined
after introduction of derivatives trading
(Gupta, 2002; and Nath, 2003). Theoretical
studies on the effects of futures trading on the
spot return volatility shows that the effect is
ambiguous. Most of the empirical studies
suggest that the introduction of a futures
market has stabilized, or at least not
destabilized, the underlying spot market.
Kamara (1982) in his study finds that a financial
future trading reduces the cost of entry of small
traders into the financial markets. Maberly
(1987) concluded that introducing new
speculators into the markets improves risk
sharing and increases liquidity, but can make
cash prices more noisy and reduce net social
welfare if these new speculators are less
informed than traders already in the market.
Commodities form an important segment
of the futures markets. Any factors affecting the
supply or cost of production of a particular
Vol. VII, No. 2; Dec., 2011

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Indian Futures Market : An Analysis

commodity affects its futures contracts. For

example, unfavorable weather can have a
major effect on the futures of an agricultural
commodity. Traders will expect supply to dry
up in coming months causing the price to go
up. Most traders will want to go long on the
commodity, expecting price to rise. This will
push the price up for futures of the commodity.
Export import policies and restrictions may
have a bearing on how futures trade when the
goods are actually deliverable. Considering
that many futures trades are often cross border
transactions, complicated export import
formalities can lower prices.
Currency futures are influenced by many
factors, most important being the policies of the
Federal
Reserve
and
the US Treasury
regarding money supply. Government policies
regarding taxation and other decisions to bring
down inflation will also have an effect on
currency futures.
The recent performance of the dollar
versus the opposite currency in the contract
plays an important role in determining the
price at which a futures contract can be struck.
GDP growth and trade deficit should also be
considered when trading in currency futures.
It is very important that investor examines
its environment before making the decision to
trade in futures market. This paper provides an
external environment analysis aimed at
evaluating the emerging trends of index futures
and single stock futures (SSFs) in Indian futures
market, so that investors can respond quickly
to these change in the environment. A
comprehensive model of PEST analysis is used
to analyze the Political, Economic, Social and
Technological environment. The analysis
attempts to highlight the opportunities and
threats that may emerge for stock & index
futures trader to trade in Indian futures market.
Methodology
The main objective of this paper is to
identify the key factors affecting the futures

Vol. VII, No. 2; Dec., 2011

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67

market in India. For this purpose a framework

of PEST is used, which divides the factors in
four categories, namely Political, Economical,
Social and Technological. The study considered
following variables in each factor category
S.No.

Factor

1.

Political

2.

Economical

3.

Social

4.

Variables
Political Events
Inflation, Interest rate,
Exchange rate,
Economic growth
Demographic
variables

Technological Internet and banking

system

The secondary data on each variable is

collected from different sources. Then the data
is analyzed mainly by forming consolidated
tables and charts. The calculations are made
mainly on financial data for drawing
meaningful interpretations.
ANALYSIS
a) Political Factors
Political factors have a huge influence on
the regulation of the Futures market in India.
Since the market is relatively new, the
government tries to watch it closely. Before
1991, Indian economy was conservative in
nature but after globalization, more and more
foreign investors have showed their interest in
different sectors of India. India became a fast
growing economy in the world. The following
table-1 shows the FIIs participation in India.
The capital market of India is very vulnerable.
India has been politically unstable in the past
but it is somewhat politically stable now-adays. Political events in the past have affected
the stock prices due to which the trading
volume and the stock return have fluctuated
(Nishat, M. and Mustafa, K.; 2002). The political
instability of the country has a very strong
impact on the capital market (table3). The share
market of India gets impacted as the political
changes take place.

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Management Insight

The inflow and out flow of capital

depends on the political and economic
condition of the country. It is also causes
excessive fluctuation in stock market (Nishat;
2000). Sidra et al (2009), Political events affect
the stock price due to which the trading volume
and stock return fluctuate positively or
negatively as per the intensity of the event. The
BSE Index, SENSEX, and NSE Index, NIFTY
goes up and down with any kind of small and
big political news. The following table-2 shows

some big rise and fall due to some political

news. The political stability of the country is
very important for the performance and
growth of capital market in India. The political
balance of the country is the major factor in
deciding the capital market of India. Index
Futures are directly related to their
corresponding Indexes. In case of Single Stock
Futures, it is also directly correlated with
market indexes, but there may be some
exceptional cases.

Table-1
Some big falls of Indian Share Market and their reasons
Year

Index

Reasons

October
24, 2008

The Sensex plunged by 1070.63

points (10.96 percent) to close
at 8,701.07. Nifty ended at
2,557.25, Down 13.11 per cent
or 386 points.

On Friday, the Reserve Bank of India gave the

markets its biggest blow as it left key interest
rates unchanged And lowered the GDP target
to 7.5-8% for 2008-09.

10 October Sensex crashed by 801 points to

2008
close at a low of 10,528.

The crisis in the global markets, a fall in the

rupee and poor IIP numbers led to the fall.

March 3,
2008

Sensex loses 900.84 points to

close at 16,677.88

On frantic selling by funds, triggered by

deepening concern over United States
recession and some Budget-related concerns.

Friday, 25
January
2008

Sensex index soared 1,139.92

points to 18,361.66.

News that, Indias central bank may cut a key

short-term lending rate next week, dealers said.
They said sentiment also improved on hopes
possible further rate cuts by the US Federal
Reserve and a fiscal stimulus package would
help prevent the US from slipping into a
recession.

January 21, Sensex saw its loss of 1,408

2008
points at the end of the session
on Monday. The Sensex
recovered to close at 17,605.40
after it tumbled to the days
low of 16,963.96.

On high volatility as investors panicked

following weak global cues amid fears of the
US recession.

January 22, Sensex closed at a loss of 875

Weak global cues amid fears of the US
2008
points at 16,730. The Nifty closed recession.
at 4,899 at a loss of 310 points.
October 17, Sensex plunged by 1,743 points. SEBI proposal to tighten the rules for purchase
2007
The Sensex hit a low of 17,307.90. of shares and bonds in Indian companies
through the participatory note (PN) route.
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Indian Futures Market : An Analysis

69

April 2,
2007

The Sensex lost 617 points (4.7%) Reserve Bank of India decision to hike the cash
and closed at 12,455.
reserve ratio (CRR) and repo rate (RR).

May 18,
2006

The Sensex registered a fall of

points (6.76 per cent) to close
at 11,391

Government was planning to enhance the tax

liabilities for foreign institutional investors,
who have poured huge money into domestic
trading ring.

May 17,
2004

Sensex dropped by 565 points to

close at 4,505

The NDA out of power and the Left parties,

part of the UPA coalition government

April 28,
1992

The Sensex registered a fall of

570 points (12.77 %) to close
at 3,870

Harshad Mehta securities scam.

Source: Developed by the Researcher/ Data collected from NSE and BSE.
in the market. But no one knows when their
(FIIs) sentiments change, and withdraw
money from the market. One of the big reasons
of Indian markets unexpected fluctuation are
FII.
Figure-3
FII inflows in India

FIIs are the most important part of Indian

futures market. From the figure-2, we see that
their participations are increasing continuously
which improves trading volume and liquidity

McKenzie and Faff (2003) have shown that

the conditional autocorrelation in stock returns
is highly dependent on trading volume for
individual stocks but not for the index,
reflecting the fact that liquidity disparity for
stocks has a significant impact at individual
level but not at the aggregate level. Santa- Clara
et al (2000), with the cross-sectional evidence
Vol. VII, No. 2; Dec., 2011
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from size-sorted and industry portfolios

suggest that the party in the presidency may
affect the stock market through differences in
fiscal and regulatory policies.
Indeed, previous research has found that
GDP growth is slower during Republican
presidential mandates, and that Democratic

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Management Insight

administrations have been associated with

significantly higher inflation rates (Alesina1987), Alesina (1995). There is also substantial

evidence that macroeconomic variables related

to the business cycle can forecast stock market
returns.

Table-2
Market Return Volatility: Pre and Post Election period
Year

%Return
before election
1 Month

12 Month

% Return
after election
3 Month

3 Month

6 Month

12 Month

1984

4.8

4.4

3.8

29.4

68

92.9

1989

-3.9

0.2

11.9

-2.3

13.1

90.8

1991

11.7

8.9

44

42.1

142.8

1996

11.8

33.2

6.7

-9.2

-18.9

-1.5

1998

-2

14.9

14

-14.5

-3.3

1999

2.9

16.7

-4.5

6.5

6.4

-13

2004

-13.4

-10.7

-5.8

6.7

16.7

2009

-2.84

-19.69

39.33

24.76

37.51

41.46

Source: Developed by the Researcher/ Data collected from different sources

Table-2 shows the impact of Lok Sabha
election on market return which is an
indication of the market strength and hence
signifies the impact of the election on Index
futures. This table shows the variation of
market return one year before the election
(pre election) and one year after the election
(post election). The calculation starts from
1984 and covers till 2009. It can be clearly
observed from the table that there is a positive
variation of market return before and after the
election. However some times (general
election of 1996 and 1998) this trend of market
return is in the opposite direction. This
indicates that there may be some latent factors
which affect the index futures return.
According to Campbell, Grossman and Wang
(1993), the fluctuation in trading activity is not
only explained by publicly available
information but also by non-information trade
due to events, short selling, and insider traders.
These factors are exogenous to the general price
behavior in stock market.

b) Economic Factors
The economic measures taken by the
government of India have a very strong
relationship with the capital markets and stock
index futures market is directly related to
capital market. Whenever the annual budget is
announced the capital market goes up and
down with the economic policies of the
government. If the policies are supportive to
the companies then the capital market takes it
positively by moving up and if there is any
policy that is not supportive and it tends to
bring the capital market down.
The economic factors in India are
improving continuously. The GDP (Purchasing
Power Parity), the GDP- per Capita (PPP), the
GDP- real growth rate and also other economic
factor has been shown in the following table-4,
which indicates a tremendous economic
growth story.
The economic factors which have more
influence on index futures and single stock futures
(SSF) market are:
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Indian Futures Market : An Analysis

Inflation rate

Economic growth

Exchange rates

Interest rates

71

Inflation Rate
The inflation rate (table-3) in India was
last reported at 9.7 percent in October of 2010.
From 1969 until 2010, the average inflation rate
in India was 7.99 percent reaching an historical

high of 34.68 percent in September of 1974 and

a record low of -11.31 percent in May of 1976. In
the present scenario, the inflation rate of India
became a matter of concern which affects the
savings of the investors and ultimately which
influence the futures market. To control the
inflation RBI & government, frequently apply
their tolls (Credit reserve ratio, Bank rate, etc)
to control the inflation which creates
uncertainty in capital market and investors
avoid trading in futures.

Table-3
Inflation Rate chart (%)
Year

Jan

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

2010 16.22 14.86

14.86

13.33

13.91

13.73

11.25

9.88

9.82

9.70

2009 10.45

9.63

8.03

8.70

8.63

9.29

11.89

11.72

11.64

11.49

13.51 14.97

2008

5.47

7.87

7.81

7.75

7.69

8.33

9.02

9.77

10.45

10.45

5.51

Feb

Nov

Dec

9.70

* The table displays the monthly average.

Source: http://www.tradingeconomics.com/Economics/Inflation, Retrieved 02-12-2010
* Note: Inflation rate refers to a general rise in prices measured against a standard level of
purchasing power. The most well known measures of Inflation are the CPI which measures
consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic
economy.
Interest Rate
The benchmark interest rate (reverse repo)
in India was last reported at 5.25 percent. In
India, interest rate decisions are taken by the
Reserve Bank of Indias Central Board of
Directors. The official interest rate is the
benchmark repurchase rate. From 2000 until
2010, Indias average interest rate was 5.82
percent reaching an historical high of 14.50
percent in August of 2000 and a record low of
3.25 percent in April of 2009. To control the
inflation RBI keeps changing the interest rate
and as a result we see too much fluctuation in
Stock and Index futures and it becomes difficult
to manage the margin in futures trading.
Fluctuations give opportunities also but only to
experienced and large investors, small retail
investors usually lose their money in uncertain
markets fluctuations. The power of the relative
Vol. VII, No. 2; Dec., 2011
Art_07

interest rate to forecast expected returns was

argued by Campbell (1991), and Hodrick
(1992). Empirical studies on the effects of stock
index futures trading on the stability of the cash
market are one shot event studies examining
characteristics of returns about the effects of
futures trading. While it is impossible to
control for and refute all conceivable
alternatives to the hypothesis that the inception
of futures trading affects the volatility of stock
returns, there is a need to account for the most
likely alternative explanations. The two most
likely alternative explanations for changes in
the
volatility
of
stock
returns
are
microeconomic factors and macroeconomic.
Harris (1989) investigates the former and this
study investigates the latter. The stability of the
residual volatility is tested after adjusting for
the effects of macroeconomic factors as
identified in CRR.

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Management Insight

Table-4
Interest Rate chart (%)
May
Jun
Jul
Aug

Year

Jan

Feb

Mar

Apr

Sep

2010

3.25

3.25

3.38

3.63

3.75

3.75

4.08

4.50

5.00

2009

4.50

4.00

3.75

3.38

3.25

3.25

3.25

3.25

3.25

2008

6.00

6.00

6.00

6.00

6.00

6.00

6.00

6.00

6.00

Oct

Nov

Dec

5.25

5.25

3.25

3.25

3.25

6.00

6.00

5.50

* The table above displays the monthly average.

Source: http://www.tradingeconomics.com/Economics/Interest, Retrieved 02-12-2010
Exchange Rate
The Indian Rupee exchange rate
(USDINR) depreciated 3.26 percent during the
last 12 months. From 1973 until 2010 the

Year

Jan

Feb

USDINR exchange averaged 29.47 reaching an

historical high of 51.97 in March of 2009 and a
record low of 7.19 in March of 1973. From table5, we can observe that Indian currency is
improving and it is good for Indian economy.

Table-5
Rupee Exchange Rate Chart (USDINR), (%)
Mar
Apr May
Jun
Jul
Aug Sep

Oct

Nov

Dec

2010 45.96 46.35

45.48

44.48

45.82

46.58

46.84

46.37

45.04

44.42

45.34 45.36

2009 48.87 49.31

51.25

50.10

48.52

47.79

48.45

48.33

48.45

46.72

46.57 46.61

2008 39.37 39.76

40.33

40.03

42.12

42.85

42.84

43.07

45.52

48.67

48.99 48.68

* The table above displays the monthly average.

Source: http://www.tradingeconomics.com/Economics/Currency.aspx, Retrieved 02-12-2010
Figure-3
Statistical graph of Inflation, Interest rate, Exchange rate and GDP

Source: Compiled by the Researcher from Economic survey of India

Vol. VII, No. 2; Dec., 2011
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Indian Futures Market : An Analysis

73

From the above figure-3, we show that

GDP, Interest rate and Exchange rate of India

are favourable for futures market but Inflation

rate goes against it.

Table-6
Growth pattern of India
Economic Indicators

1950
-51

1960
-61

1970
-71

GDP at factor cost:at

current prices Rs. cr.

9719

16512

42981 132520 515032 1925017 3402316 3941865 4540987 5228650Q

GDP at factor cost: at

constant prices Rs. cr.
Per capita Net National
Product at constant prices
Rs.

1980
-81

1990
-91

2000
-01

2005
-06

2006
-07

2007
-08

2008
-09

224786 329825 474131 641921 1083572 1864300 3249130 3564627 3893457 4154973Q
5708

7121

8091

8594

11535

16172

25969

28074

30316

31821Q

Gross Domestic Capital

Formation as percentage to
GDP atcurrent market prices

8.4

14.0

15.1

19.9

26.0

24.3

34.3

35.5

37.7

34.9

Gross domestic savings

as percentage to GDP at
current market prices

8.6

11.2

14.2

18.5

22.8

23.7

33.1

34.4

36.4

32.5

Index of agricultural
production (Base: triennium
ending 1981-82)

46.2

68.8

85.9

102.1

148.4

165.7

191.9

200.7

207.1

185.6

Index of industrial
production. (Base:
1993-94=100)

7.9b

15.6

28.1

43.1

91.6

162.6

221.5

247.1

268.0

275.4

Wholesale Price Index

average (Base 199394=100)

6.8

7.9

14.3

36.8

73.7

155.7

195.6

206.2

215.8

233.9

Output Food grains

(million tons)

50.8

82.0

108.4

129.6

176.4

196.8

208.6

217.3

230.8

233.9d

Exports Rs. crore

606

642

1535

6711

32553

203571 456418

571779

655864

840755

Imports Rs. crore

608

1122

1634

12549

43198

230873 660409

840506 1012312 1374436

Population (Million)

359.0

434.0

541.0

679.0

839.0

1019

1106

1122

1138

1154

Birth Rate (per 1000)

39.9

41.7

36.9

33.9

29.5

25.4

23.5

23.8

23.5

22.8

Death Rate (per 1000)

27.4

22.8

14.9

12.5

9.8

8.4

7.5

7.6

7.4

7.4

Education: Literacy
Rate (%)

18.3

28.3

34.4

43.6

52.2

64.8

67.6

na

na

na

(a) Male

27.2

40.4

46.0

56.4

64.1

75.3

na

na

na

na

(b) Female

8.9

15.4

22.0

29.8

39.3

53.7

na

na

na

na

SOCIAL INDICATORS

Source: Compiled from Economic Survey- 2009-10

Vol. VII, No. 2; Dec., 2011

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Management Insight

Population growth rate: 1.578% (2008

estimate); Birth rate: 22.22 births/1,000
population (2008 estimate); Death rate: 6.4
deaths/1,000 population (2008 estimate)

Q Quick estimates.

na: Not available.

b Relates to the calendar year 1950.

Note: Data on GDP at factor cost at constant

prices and per capita Net National Product
at constant prices relates to 1999-2000 prices
upto

2000-01. From 2005-06 onwards, data are

based on new series (2004-05) prices.

c) Social Factors
India is a country of social diversities
having different sub-cultures, languages,
customs, religions, castes, etc.
Population
With more than 1 billion inhabitants, India
ranks second only to China among the worlds
most populous countries. Its people are
culturally diverse, and religion plays an
important role in the life of the country. About
80.5% of the Indians practice Hinduism, a
religion that originated in India. Another 13.4%
of the population is Muslims. This makes India
home to the third-largest Muslim population in
the world after Indonesia and Pakistan. India
also contains the majority of the worlds
Christians (2.3%), Sikhs (2%), Buddhists (0.8%),
Jains (0.4%) and Jews. Eighteen major
languages and more than 1,000 minor
languages and dialects are spoken in India.
Total
estimate)

Population:

1,147,995,904

(2008

Age structure: 0-14 years: 31.5% (male

189,238,487/female
172,168,306)
(2008
estimate);
15-64
years:
63.3%
(male
374,157,581/female
352,868,003)
(2008
estimate); 65 years and over: 5.2% (male
28,285,796/female 31,277,725) (2008 estimate)
Median age: total: 24.1 years; male: 24.1
years; female: 24.2 years (2002)
Sex Ratio: At birth: 1.12 male(s)/female
(2008); Under 15: 1.10 male(s)/female (2008);
15-64 years: 1.06; male(s)/female (2008)

The futures market is not much affecting

social factors. However, it does not mean that
social factors are not important to the futures
market. Education, health, saving of Indian is
improving continuously (table-6). These factors
directly or indirectly influence futures market.
For example, an improvement in the education
of people is likely to increase their
employability. This in turn is likely to increase
their income and ultimately their savings.
These savings may be directly or indirectly
diverted to the futures market and as a result
liquidity and turnover of futures market is
likely to increase.
d) Technological Factors
Internet Trading
The advancement of information and
communication technology is changing the
competitive environment in the futures market.
The Internet is an absolutely revolutionary
concept in the financial services area. The new
trading method, internet trading, has become a
required distribution channel, taking the
investors away from the traditional trading.
The advantages of Internet trading are quite
visible. First of all, the cost of making a trade
has plummeted. Many on-line Indian
brokerage firms charged as low as 0.03 % of the
turnover as brokerage and the competition is
continuous among the brokerage houses. They
are charging low brokerage to attract the
customers. The Internet makes it convenient for
customers to do Futures trading. Traders can
obtain real-time quotes, place orders, and
receive related market data, news, and services
anytime anywhere, no matter whether they are
on a business trip or are at home. Internet
trading is also convenient because it is quick
and easy to trade.
Internet trading gives investors full
control of their Futures trading activities. The
Vol. VII, No. 2; Dec., 2011

Art_07

Indian Futures Market : An Analysis

investors design their own trading strategy and

make all decisions. For investors who are not
seeking personal investment advice, online
trading can be very useful. If one can trades
without the help of a professional broker,
internet trading is an ideal trading tool for
them. On-line investors are using the Internet
to their advantage, and the entire structure of
Futures market is changing as a result. Equally
more and more businesses have turned
towards the Internet because of the large
number of customers which can be reached
through it. Most of the companies have internet
trading systems which enable customers at
their home to trade, with them by using their
PCs. Internet trading systems enable the
brokerage firms to cut costs, reduce orderprocessing time and improve information flow.
However, Internet trading had some
disadvantages too. The first of these
disadvantages is the reliability of online
trading system. There are several factors that
can affect the stability of the system. The online
brokers server and the users personal
computer may be down. The Internet service
can be down too. Also, the power cut may
disrupt trading. In addition, the rapid growth
of Internet trading requires to companies to
constantly implement changes to meet the
customers growing needs. Firms need
consistently to add more features to the
software applications and upgrade to faster
and more secure hardware. Computer experts
need to be hired to maintain the system.
Inappropriate management of the internet
system may lead to huge costs and system
failure. Finally, the Internet trading system is
not 100% safe. Online security is one of the
major concerns of investors.
Banking System: It become very easy to
transferring money around the world with the
development of communication technology
and advanced banking systems. For Futures
trading, it is crucial for customers to maintain a
certain margin level in their account. In the
past, it used to take a few days to move money
Vol. VII, No. 2; Dec., 2011
Art_07

75

around the country. Nowadays, people can

transfer money to their account within
minutes, which makes the Futures business
more manageable. People can access their bank
accounts using internet as well s their cellular
phones.
However, there are several issues which
are hampering the flowering of Indian
economy and also the Futures market in turn.
They are mentioned as under:
Infrastructure: Indias low spending on
power,
construction,
transportation,
bureaucratic
inefficiencies,
urban-bias,
telecommunications and real estate, are
preventing India from sustaining higher
growth rates. In the major part of India, only
44% of rural households have access to
electricity which further deteriorates because
of power-thefts, public sector corruption and
other causes.
Education: In spite of the right to
education, free education to all children, huge
progress in terms of increasing primary
education attendance
rate
and
expanding literacy to
approximately
two
thirds of the population, a lot is still missing.
However, the literacy rate of 65% is still lower
than the worldwide average and the country
suffers from a high dropout rate.
Laws: India is ranked 133th on the Ease of
Doing Business Index (2010), behind countries
such as China , Pakistan, and Nigeria. The
Constitution provides protection of child labor,
slavery, equality of opportunities and forced
labor etc. in form of fundamental rights, but the
implementation of provisions cited is a matter
of concern. Better designed labor regulations
can attract more labor- intensive investment
and create jobs for Indias unemployed
millions and those trapped in poor quality jobs
World Bank: India Country Overview 2008.
Economic disparities: A basic problem
facing Indias economy is the sharp and
growing regional variations among Indias
different states and territories in terms of per

76

Management Insight

capita income, poverty, availability of

infrastructure
and
socio-economic
development.
Reforming
cumbersome
regulatory procedures, improving rural
connectivity, establishing law and order are
essential to create a stable platform for natural
resource investment. It could balance business
opportunity, reinforcing the Futures market.
Agriculture: though 65% of India still lives
in villages, but agriculture has not received the
right kind of attention yet. Current agricultural

practices are neither economically nor are

environmentally sustainable, causing little
improvement in yields for many agricultural
commodities low. Disheveled roads, poor
market infrastructure, and excessive regulation
make farmers access to markets difficult.
Corruption: Corruption has been one of the
pervasive problems affecting India. The 2010
report by Transparency International ranks
India at 87th place and states that significant
setbacks were made by India in reducing
corruption.

Figure-4
Business growth of F & O

Segment
Source: NSE fact book-2010-11
CONCLUSION
The Indian governments efforts are
directed towards the establishment of a free,
fair, transparent and fully informed market
with help of the Futures market, so that futures
prices are truly determined by the forces of
demand and supply. In the long term, the
continuing rapid growth of economy in India
creates a huge potential for Futures market
(Figure-4). The entry of the foreign investment
firms will help the development of the market
as the trading will be very active when there
are a large number of participants. Social
factors suggest that there will be increasing
savings power, improved education and

employment scenario in India which is likely to

bring domestic investors towards futures
market. Moreover, the Internet trading system
is also changing the competitive environment
of the futures market industry since more and
more investors are adopting the low cost and
convenient trading system associated with it.
The advanced banking system is making the
futures business more manageable. Although
the Indian market has been quite volatile, retail
and small investors should adopt some predetermined strategies to be safe against the
unexpected turns of the market. Chidambaram
(2008) said that retail investors should gain
knowledge before entering into currency
Vol. VII, No. 2; Dec., 2011

Art_07

Indian Futures Market : An Analysis

futures market. The risks could be very high

and so retail investors should not jump into it
unprepared.
With an improving agriculture, widening
scope of education, a balanced economy,
friendlier infrastructure, vividly sketched out
laws unstained by any kind of corruption will
create the right climate for swift growth of the
futures market. The PEST analysis shows that
most of the factors considered are indeed going
in favour of Indias futures market.

77
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