Is the liquidity in India adequate to support well-functioning derivatives markets?
The one-way market impact cost faced by arbitrageurs working the NSE-50 is around 0.25%. This is similar to that seen by arbitrageurs working the S&P 500. This suggests that market liquidity by itself will not be a serious constraint in the face of an index derivatives market in India. It should be noted that market impact cost is not the only component of transactions costs that arbitrageurs face. It is true that post-trade costs are higher in India (thanks to the small role that the book-entry trading plays (as of today)). However, market liquidity is not a constraint in index-based products based on Nifty.
