India’s derivatives market has seen a 20-25% decline in trading volumes in early July. The drop follows new RBI rules requiring full collateral for proprietary trading, combined with lower market volatility and higher transaction taxes.
The Indian derivatives market is undergoing a notable cooling phase, with trading volumes in early July estimated to be 20-25% lower than those recorded in June. This trend is driven by a mix of regulatory changes from the Reserve Bank of India, a decline in market volatility, and the cumulative effect of higher trading costs.
Impact of RBI’s New Collateral Norms
Effective July 1, the Reserve Bank of India implemented stricter guidelines for proprietary trading desks—the internal trading divisions of banks and large financial firms. The regulator now mandates that bank guarantees issued for proprietary trading positions must be backed by 100% collateral. This must consist of at least 50% in cash, with the remainder held in cash equivalents or government securities.
Before this change, many proprietary desks utilized leverage backed by bank guarantees with lower collateral requirements. By forcing a move to 100% collateral, the RBI has effectively increased the cost of capital for these desks. Since proprietary trading accounts for a significant portion of options volume on Indian exchanges, this tightening directly reduces the available leverage for these participants.
Volatility and Cost Pressures
The volume decline is further supported by a change in market conditions. The India VIX, a key gauge of market fear and expected volatility, has cooled to approximately 11.5, down significantly from nearly 17 in early June. Lower volatility typically leads to compressed option premiums, making the derivatives segment less attractive for traders who rely on price swings to generate profit.
Additionally, market participants are feeling the impact of the Securities Transaction Tax (STT) hike that came into effect on April 1. By raising the cost of each transaction, the tax acts as a hurdle for high-frequency and active traders, contributing to the overall slowdown in volume.
What Investors Should Monitor Next
While retail client-based brokerage activity remains largely outside the scope of these specific proprietary trading rules, the long-term impact on overall market liquidity remains a key monitorable. Investors should track whether the decline in proprietary trading activity leads to wider bid-ask spreads—the difference between the buying and selling price—which can make it more expensive for all market participants to enter or exit positions. The market will also be watching if the current moderation in volumes is a temporary adjustment as desks restructure their capital, or if it represents a permanent shift in how proprietary desks operate within the Indian financial ecosystem.