This paper empirically examines the relationship between spot rate and futures rate
for the period June 2000 to February 2004. The futures must be an unbiased
forecaster of the future spot rate, otherwise informed traders could profit from the
bias by taking one position in the cash market and the opposite position in the
futures market. Two models are employed for testing the efficiency of market by OLS
method. Our results establish the fact that futures market in India is not efficient
and informed traders could make profit by employing some strategy. Futures rate is
not a predictor of future spot rate.
Financial liberalization started in the 1990s in India. The financial sector reforms have affected
all three spheres of Indian financial system: Capital markets, banking and insurance. The reforms
were aimed at enhancing, competition, transparency, and efficiency. One decade of reforms
brought a major transformation and structural change during this period. The most striking
development was the simultaneous setting up of Securities and Exchange Board of India (SEBI)
as the regulator of capital market and National Stock Exchange (NSE), a fully electronic order book
driven exchange with a clearing corporation and a share depository which ensured transparency
in the operations. Besides this, mutual fund operators and Indian firms were allowed to raise funds
from offshore market through Global Depository Receipts (GDRs) and American Depository
Receipts (ADRs) and capital market was opened for foreign institutional investors.
A major reform initiated by SEBI was the introduction of derivatives products. It was
introduced as a part of capital market reforms to hedge price risk. This was initiated by the
Government of India through L C Gupta Committee Report. The L C Gupta Committee on
Derivatives had recommended in 1997 its introduction in a phased manner. Accordingly, stock
index futures were introduced on Bombay Stock Exchange (BSE) and National Stock Exchange
(NSE) in the first. BSE was the first stock exchange in the country, which commenced trading
in index futures based on BSE Sensex on June 9, 2000. Following that NSE introduced its trading
based on S&P CNX Nifty on June 12, 2000. Subsequently, other products like stock futures on
individual securities were introduced in November 2001. This was followed by approval of
trading in index options based on these two indices and options on individual securities. It has
been almost four years since the introduction of Index futures in India as a risk management
tool for institutional and other investors. Trading on the derivatives segment of NSE and BSE
has witnessed a moderate turnover in these four years. |
