GIFT Nifty Turnover Plummets After Record Volume in April

The volume of Nifty derivative contracts traded on the NSE International Exchange at GIFT City, Gandhinagar, has significantly decreased this month. May's turnover stands at $44.24 billion, representing a nearly 46% drop from the record $82 billion recorded in April.

The recent surge in the International Financial Services Centre (IFSC) is attributed to foreign investors, who are the sole drivers of its volume. This trend is mirrored by the significant selling activity of Foreign Portfolio Investors (FPIs) in the domestic cash market, with data revealing net sales of Indian shares worth almost $2.7 billion by FPIs in May 2023, as of May 24th.

The uncertainty surrounding election results is widely considered the main driver behind recent market selling. As a result, most market experts believe foreign investors are adopting a wait-and-see approach, leading to reduced trading volumes in GIFT Nifty contracts.

“Market sentiment oscillates between extreme pessimism and optimism, reflected in significant swings in the VIX. Volatility has led FIIs to remain cautious, impacting market volumes, said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities.

Since their introduction on July 3rd of last year, GIFT Nifty contracts have experienced a continuous rise in trading activity on the NSE IX. In the current calendar year, turnover has consistently exceeded $70 billion, reaching a remarkable high of $82 billion in April, setting a new record for the exchange.

GIFT Nifty experienced a turnover range of $58-65 billion from July to December 2023, indicating substantial investor involvement. By April, GIFT Nifty had amassed approximately 16.9 million contracts and a cumulative turnover of $694 billion, according to GIFT IFSC. Notably, despite a decline in GIFT Nifty volumes, the open interest has remained relatively stable.

Deepak Jasani, head of retail research at HDFC Securities, said several factors may explain this decline in intraday volume: foreign and other participants are trading less intraday, the GIFT Nifty is exhibiting higher volatility, and the lower depth compared to the domestic Nifty. 

The domestic Nifty contract size has been cut in half since late April, resulting in lower contract values and a shift in trading volume away from the GIFT Nifty. This has led to a doubling of the price difference between the GIFT Nifty and the domestic Nifty, making the GIFT Nifty relatively more expensive.

Furthermore, post-election results, there were anticipations of rupee appreciation. To prevent potential losses from converting dollar margins into rupees due to a stronger rupee, traders are reducing open positions in the GIFT Nifty. This caution is justified considering the rupee's recent strengthening against the dollar.

Alok Churiwala, MD of Churiwala Securities, explained the current market sentiment, stating, 'On Dalal Street, there's a common saying: 'Sell in May and go away…'. This is because May is typically a month with lower trading volumes due to summer holidays in India. Additionally, the recent buoyancy and record highs in the US markets may be contributing to a temporary decline in interest in Indian indices.'