In a significant move poised to deepen India’s derivatives market, the National Stock Exchange (NSE) has announced its plan to launch derivative products based on the Nifty Next 50 index starting April 24. This initiative underscores NSE’s commitment to offer a comprehensive range of trading options to its diverse clientele and contribute to the overall liquidity and dynamism of the Indian capital markets.
The Nifty Next 50 index is a compilation of the 50 most sizable companies from the broader Nifty 100, after excluding those listed on the benchmark Nifty 50 index. Representing a blend of several sectors, the index provides a peek into the potential blue-chip corporations of tomorrow, capturing a slice of the market that lies between the well-established large caps and the burgeoning mid-cap segment. This makes the index a pivotal gauge for investors looking beyond the premier league of Indian stocks for growth opportunities.
Authorized by the Securities and Exchange Board of India (Sebi), the introduction of derivatives on this index aims to furnish investors with more strategic tools for managing portfolio risk and enhancing market exposure. The NSE’s introduction of three serial monthly index futures and index options contract cycles is in line with the exchange’s broader strategy to bolster its derivatives offerings. These cash-settled contracts will follow the conventional pattern, expiring on the last Friday of the designated expiry month.
This addition is seen as a complement to the existing suite of index derivatives products currently available to market participants, and according to Sriram Krishnan, the Chief Business Development Officer at NSE, will bridge the gap between the well-known Nifty 50 index and the promising Nifty Midcap Select index.
The Nifty Next 50 index boats significant market involvement. As of March 2024, the index’s market capitalization stands at a hefty ₹70 trillion, accounting for about 18% of the total market cap of all stocks listed on the NSE. The financial services sector heavily influences the index with a 23.76% weighting, alongside substantial inputs from the capital goods and consumer services sectors. Since its inception on January 1, 1997, the index has carved a niche for itself, providing market spectators with a secondary lens to the Indian equity market’s performance.
With an aggregate daily average turnover of the index constituents at ₹9,560 crore for the fiscal year ending 2024, the derivatives contracts are expected to attract substantial interest, given these securities contribute to approximately 12% of the cash market turnover. This level of liquidity is one of the key elements that can contribute to the successful uptake and trading activity of the newly introduced derivatives contracts.
NSE’s foray into Nifty Next 50 index derivatives follows its earlier launches such as the derivatives on the Nifty Financial Services index in January 2020 and the Nifty Midcap Select index in January 2022, not to mention the introduction of multiple commodity derivatives in October 2023. These calculated expansions stand as testament to the exchange’s effort to innovate and cater to the evolving needs of the market participants.
Derivatives are essential tools in the financial markets, serving as contracts that derive their value from an underlying asset or reference point. The two primary forms of derivative contracts are futures and options, representing binding agreements to trade an asset on a later date and legal instruments giving the owner the right, but not the obligation, to execute a trade at a predetermined price, respectively. Derivatives are central to a vibrant economic environment, allowing for hedging, speculation, and price discovery.
This move by NSE to include derivatives on the Nifty Next 50 index epitomizes the progressive trajectory of India’s financial markets, affording investors and traders new avenues to diversify and amplify their market strategies. As anticipation builds toward the launch date, market participants are gearing up to leverage these new instruments in their portfolio management arsenals, marking yet another milestone in the maturation of the Indian capital markets.
