The National Stock Exchange (NSE) of India is poised for a significant expansion of its derivatives offering, with the introduction of derivative contracts tied to the Nifty Next 50 index commencing from Wednesday. This marks a pivotal step for the exchange, following the green light from the Securities and Exchange Board of India (Sebi), the country’s market regulator.
The Nifty Next 50 index embodies a unique slice of the Indian marketplace, consisting of the subsequent 50 firms in line after the leading Nifty 50 corporations within the Nifty 100 index. The derivative contracts that the NSE is rolling out will encompass three consecutive monthly index futures and index options contract series. They will follow the cash-settled format and are set to mature on the last Friday of the month designated as the expiry month.
With the launch of these derivatives, NSE is enhancing its existing index derivatives product suite, filling the gap between the Nifty 50—which captures the essence of top large and liquid companies—and the Nifty Midcap Select index, embracing the prime large and liquid mid-capitalised firms. Sriram Krishnan, Chief Business Development Officer at the NSE, highlighted the role of the Nifty Next 50 index last week, illustrating its significance in representing a critical segment of the Indian stock market landscape.
Interestingly, as we assessed the index’s composition in March 2024, the financial services sector was preeminent, with a weightage of 23.76%, followed by capital goods and consumer services, with respective weights of 11.91% and 11.57%. Since its inception on January 1, 1997, the Nifty Next 50 index has grown to be a barometer for the companies positioned just outside of India’s corporate giants.
The market valuation of the businesses making up the Nifty Next 50 index stands at a formidable Rs 70 trillion, accounting for approximately 18% of the total market capitalization of entities listed on the NSE as of March 29, 2024. In terms of turnover, these companies collectively recorded an impressive daily average turnover of Rs 9,560 crore during the fiscal year 2024, contributing to around 12% of total cash market turnover.
To put this development into context, derivatives are specialized financial instruments that involve contracts between parties, with values pegged to underlying assets or benchmarks. These are vital tools for risk management and have become integral components of modern financial markets. Derivatives can broadly be categorized into futures and options contracts. Futures involve a legal obligation to buy or sell the underlying security at a designated future date, while options provide the holder with the right, but not the obligation, to buy or sell the underlying at a predetermined price within a set timeframe or upon expiry.
The introduction of derivatives linked to the Nifty Next 50 index promises to diversify the opportunities for investors and traders within India’s burgeoning financial markets. It symbolizes NSE’s ongoing commitment to enrich the Indian capital market ecosystem, offering additional layers of flexibility and exposure to prospective market developments.
As the country anticipates the official commencement of trading in these new derivatives, market participants are gearing up to integrate these instruments into their strategic planning. This strategic expansion of NSE’s derivatives portfolio is expected not only to cater to the needs of a wider range of investors but also to bolster the overall depth and liquidity of the Indian equity derivatives market. With this move, NSE reaffirms its stance as an innovative market leader, dedicated to advancing India’s position in the global financial landscape.
