India’s leading stock exchanges are expected to continue benefiting from strong earnings growth and diversified revenue sources. However, a new report by Dolat Capital suggests that the Reserve Bank of India’s (RBI) latest margin funding regulations could significantly impact proprietary trading activity, leading to a decline in options trading volumes over the next two financial years.
According to the brokerage, average daily turnover (ADTO) in the options segment could fall by as much as 20% in FY28, primarily due to higher funding costs for proprietary traders.
Stock Exchanges Continue to Benefit from Strong Growth
Over the past few years, Indian stock exchanges have reported robust profitability, largely driven by the rapid expansion of index options trading.
Besides higher trading activity, exchanges have strengthened their financial performance through operational efficiencies and by expanding into new revenue streams, including:
- Colocation services
- Clearing and settlement operations
- Mutual fund transaction platforms
These businesses have helped diversify income sources beyond traditional trading revenues.
RBI’s Margin Funding Rules Could Impact Trading Activity
Despite the positive long-term outlook, Dolat Capital believes the RBI’s recent restrictions on the use of bank guarantees (BGs) for leveraged trading may reduce activity among proprietary traders.
Previously, many trading firms relied on low-cost bank guarantees to fund leveraged positions. However, with tighter regulations in place, traders may need to shift to commercial papers (CPs) as an alternative funding source.
The report notes that this change significantly increases financing costs.
While funding through bank guarantees typically costs around 1%, raising capital through commercial papers can cost nearly 11%, making leveraged trading strategies considerably more expensive.
As a result, many proprietary trading firms may reduce their market participation.
Proprietary Traders Play a Major Role in Market Volumes
Dolat Capital highlighted that proprietary traders, including high-frequency trading (HFT) firms, contribute a substantial share of trading activity on Indian exchanges.
For the National Stock Exchange (NSE):
- Proprietary traders account for more than 45% of index options trading volumes.
- Index options generate approximately 53% of the exchange’s total revenue.
- These traders also contribute around 28% of stock futures trading volumes.
Given their significant market presence, any reduction in proprietary trading could directly affect exchange volumes.
Options and Futures Volumes May Decline in FY27 and FY28
After incorporating the impact of the RBI’s new funding rules, Dolat Capital has revised its trading volume projections.
The brokerage now expects:
NSE Outlook
Options Average Daily Turnover (ADTO):
- Decline of 8% in FY27
- Decline of 18% in FY28
Futures Average Daily Turnover (ADTO):
- Decline of 3% in FY27
- Decline of 6% in FY28
The report states that these estimates have been adjusted from its earlier base-case forecasts to reflect the likely impact of the new regulations.
BSE Could Also See Lower Options Volumes
The report suggests that the Bombay Stock Exchange (BSE) could face a similar trend.
According to Dolat Capital:
- Proprietary traders contribute more than 50% of BSE’s index options trading volumes.
- Index options account for nearly 60% of BSE’s overall revenue.
Based on the revised assumptions, the brokerage expects BSE’s index options average daily turnover to decline by:
- 10% in FY27
- 20% in FY28
Outlook for Indian Stock Exchanges
Although the RBI’s revised margin funding framework may temporarily reduce proprietary trading activity and derivatives volumes, the report notes that Indian exchanges continue to benefit from strong structural growth, expanding product offerings, and diversified revenue streams.
Going forward, the pace at which proprietary traders adapt to the new funding environment will play a crucial role in determining trading volumes and revenue growth for both NSE and BSE over the next few years.