India’s financial markets today reflect the energy of a nation on the move. Each day, over eight crore individual investors log into trading apps, browse through market dashboards, and partake in the story of India’s growth. The number of demat accounts has surpassed 15 crores, nearly doubling in the last four years, a milestone that positions India among the world’s most retail- active markets.

This surge in participation is a remarkable achievement. It demonstrates public confidence in market institutions, seamless digital access, and forward-looking regulation. It also signifies a profound cultural shift, from physical savings to financial ownership. However, with this scale and speed of inclusion, markets are beginning to face new forms of complexity that require continuously evolving strategies safeguards.

Complexity and Opportunity In Derivatives

The derivatives segment clearly demonstrates this transformation. In just five years, equity- index options trading has grown more than eight times, making India one of the largest derivatives markets globally by notional value. Technology has allowed trades to be squared off in milliseconds, and the involvement of younger, tech-savvy investors has made derivatives a mainstream part of the financial landscape.

However, this velocity also introduces new dynamics. On certain trading days, especially near expiry, deep out-of-the-money option contracts have shown nearly vertical price jumps, sometimes increasing by several multiples within minutes. While these instances are rare, they demonstrate how concentrated order flows and algorithmic trading can intensify movements in strikes that are far out of the money with low liquidity. Although these episodes are brief, they underscore the need for closer monitoring in a market where scale amplifies every movement.

Volatility and Global Linkages

Periods of increased volatility often align with foreign portfolio investor (FPI) outflows as global funds rebalance their holdings. In 2024 alone, India experienced net FPI withdrawals exceeding Rs 1.2 lakh crore amid global uncertainty, even as domestic inflows from retail and mutual funds helped maintain stability. Retail investors, now representing nearly 38 per cent of cash-market activity, have become the stabilising counterbalance to global fund flows.

That confidence, however, depends on trust that market prices reflect real demand and supply rather than distortions. Maintaining that trust is not about enforcement; it is about consistency, making sure markets stay fair, efficient, and trusted.

From Regulation to Anticipation

India’s regulatory framework has consistently shown foresight. Features like dynamic price bands, real-time risk management, and cross-market surveillance have helped ensure that, despite global challenges, our markets keep running smoothly. The next step is proactive supervision, identifying emerging structural risks before they affect market participants.

Global experience shows that successful derivatives markets are not those with unrestricted access but those with smart safeguards. The United States responded to its rise in zero-day-to- expiry (0DTE) options by enhancing algorithmic monitoring and margin sensitivity rather than imposing restrictions, thereby allowing innovation to continue with robust risk controls. Following its KOSPI-200 incident, South Korea adjusted its market design by tightening strike ranges, increasing margins for out-of-the-money contracts, and establishing a dedicated derivatives-risk monitoring team, thereby restoring stability without limiting liquidity.

Taken together, these models suggest a practical framework for India, one that integrates data- driven, real-time surveillance with adaptable strike rationalisation, tiered margining, and participant-level suitability standards. This approach would enhance transparency, safeguard investors, and boost market confidence, ensuring India’s derivatives ecosystem remains both innovative and institutionally robust as it develops into a global benchmark.

Empowering Investors for The Long Term

India’s new investors are digital-native and aspiring. A generation ago, only a few million individuals participated in stock- market trading; today, tens of millions do so every day. As participation grows, financial literacy and risk awareness must grow too. Focused investor- education modules on derivatives, position management, and volatility can help retail investors better navigate modern markets responsibly.

The Competitive Edge

India’s journey toward a USD 10 trillion economy depends on how effectively its markets convert household savings into productive investments. Improved supervision, increased transparency, and shared accountability among the players in the market ecosystem will ensure that the growing base of trading activity continues to serve the broader goal of nation-building. Safeguarding investor interests is not just about caution, it is a pledge to progress. As India’s markets expand and become more vibrant, trust and transparency will remain their most valuable assets. Protecting that trust is what will support India’s rise, ensuring growth, innovation, and integrity advance together toward a resilient and inclusive financial future.

Article originally published in Business World.
Author: Mr. Venkatachalam Shunmugam, partner, MCQube