| Indian Economy |
| The Indian economy continues to
be driven by domestic consumption and domestic investment.
Additional factors that have contributed to this robust
environment are sustained investment and high savings
rate. As far as the percentage of gross capital formation
in GDP is concerned, there has been a significant
rise from 22.8% in the fiscal year 2001, to 39.1%
in 2007-08. In addition, the gross rate of savings
as a proportion to GDP registered solid growth from
23.5% to 37.7% for the same period. The current household
savings is around US$ 305 billion. Channelising these
savings in to multiple investment options by opening
up the economy can generate phenomenal opportunities
in the financial market. |
|
 |
Commodities are valued at 45% of
India’s GDP with the size of the physical commodity
market at US$ 320 billion. Globally, commodity derivatives
markets are at an average 30-40x the underlying physical
market, while India currently stands at 3x. According
to a recent IDFC-SSKI research report on Indian Exchanges,
the commodity market turnover is expected to reach
US$ 4 trillion by FY 14 (Considering the fact that
the industry would take time to mature, the report
has discounted the global average by 50%).
Indian commodity market is yet to emerge in terms
of product offerings, and permitting market participants
such as FIIs, MFs and banks to trade on commodity
platforms. Thus, changes in regulations and increase
in competition in the commodity segment is certainly
set to drive liquidity on these exchanges. |
|
| |
 |
| |
| FINANCIAL MARKET IN INDIA |
| Equity |
Equity markets have exhibited 46%
CAGR over the last 14 years to reach the current annual
turnover of US$ 3 trillion. Futures & Options
(F&O) have been the key drivers of liquidity on
equity exchanges and currently contribute 72% to the
aggregate volumes. While the global average ratio
between cash and F&O is 3-5x, on Indian bourses,
the turnover in the F&O segment is 3x vis-à-vis
the cash market.
The low penetration and availability of limited risk
hedging and investment instruments in India highlight
the tremendous growth potential that exists in the
Indian financial markets. While equity market capitalisation
in India has reached significant levels (108% of GDP),
advanced processes such as algorithm trading and DMA
remain novel concepts for the Indian market. Trading
on DMA channels has been a very popular trend in developed
markets such as the US, where DMA accounts for nearly
18% of the total traded volumes. With regard to algorithm
trading, nearly 40% of the volumes traded on NYSE
are programmed. The potential opportunity offered
by these advanced technologies is immense and would
be a key growth driver for the Indian financial markets. |
| |
| Commodity |
| Commodity markets—highly unorganised
till about three years ago—are comparatively
younger in the Indian context. Interestingly, India
is one of the largest consumer of precious metals
such as gold and silver, and also the largest producer
of agri-commodities. With turnover on commodity exchanges
registering a 40x growth over the last five years,
the Indian commodities market is finally rising above
its structural inefficiencies and attracting relevant
participation as also liquidity. |
|
|
| Currency |
The foreign exchange market is huge
and continues to rise. The estimates are that contracts
worth nearly US$ 3.2 trillion were being traded each
day in the global forex markets, in 2007 (BIS report
2007). According to the report, the foreign exchange
market turnover of India in 2007 was US$ 34 billion.
It is currently estimated to be around US$ 48 billion,
of which, approximately US$ 1.2 billion USD-INR contracts
are traded on exchange platforms. We believe that
the Indian currency market will witness phenomenal
growth in currency volume with the introduction of
currency and cross currency pairs other than USD-INR
on the exchange platform.
Leading industry participants such as Reuters indicate
that the OTC market is well on its way to become a
US$ 40 billion market in the next five years. In line
with the global average ratio of 5:1 between OTC and
currency derivatives, the potential of the Indian
currency derivatives segment is pegged at US$ 8 billion
(an 8x increase from the current estimate). According
to a recent IDFC-SSKI research report on Indian Exchanges,
the currency market daily turnover is expected to
reach US$ 4 billion by FY 14 (Considering the nascent
stage of development of the segment, the report discounted
the global average by 50%). |
| |
| Bond Market |
| Total debt outstanding in the Indian
market as on June 2008 was just US$ 0.46 trillion,
constituting 33% of the total Indian capital market,
whereas, in the US market, total debt outstanding
as on June 2008 was US$ 31.1 trillion, constituting
60% of the total US capital market. The corporate
bond market in India remains minuscule, at 3.2% of
GDP compared to the equity market capitalisation of
about 108%, according to a report released by the
Asian Development Bank last year. Moreover, corporates
in the US rely on the bond market as a source of debt
funds vis-à-vis bank loans availed by Indian
companies. Bank loans as a percentage of the debt
market in India have been quite high. Therefore, there
is a need to develop the Indian bond market. |
|
|
