Regulatory Curbs Ease Index Options Activity Dip; Markets Show Early Signs of Stabilisation: ICRA

The sharp slide in index options trading volumes seems to be tapering off, with the market showing tentative signs of stabilisation. According to a report by rating agency ICRA released on Thursday, the moderation in activity reflects calculated adjustments by traders and institutional participants following recent regulatory interventions.

ICRA noted that the cooldown in options and derivatives activity largely prompted by regulatory changes introduced in November 2024 has led to notable market realignments. Despite a notable fall in volumes, the activity remains well above long-term averages, indicating underlying market resilience.

Trading Activity Trends

From December 2024 to March 2025, the average daily premium turnover in index options dropped by 18% compared to the preceding April–November period. The number of traded contracts saw a steep 60% decline.

Despite this pullback, signs of normalisation are emerging. "After three months of consistent decline, index derivatives trading seems to be stabilising," ICRA observed. The shift is attributed to "strategic recalibrations by market participants."

Margin Trading and Investor Behaviour

The use of margin trading facilities (MTF), often seen as a proxy for investor sentiment, has retreated to about ₹71,000 crore from its peak near ₹1 lakh crore in December 2024. ICRA suggests that a rebound in investor confidence could reignite activity in the segment, pushing MTF exposure back toward peak levels.

Adjustments in regulatory structure such as the rationalisation of weekly expiries and changes to lot sizes have reshaped trading preferences, pushing more activity toward longer-tenure contracts. These reforms have especially affected participation by retail investors, with smaller investors pulling back significantly.

In fact, the number of investors with monthly premium turnovers below ₹10,000 dropped 49% year-on-year in March 2025. The ₹10,000–₹1 lakh turnover bracket also saw a 37% decline. On the other hand, high-volume traders were comparatively less affected, indicating a shift in market composition.

Market Outlook

ICRA cautioned that future trading activity will remain highly dependent on upcoming regulatory moves. The industry is currently in a transitional phase, and further interventions could significantly sway participation patterns.

Deep Inder Singh, Vice President and Sector Head – Financial Sector Ratings at ICRA, added that the transition to a single weekly index derivative per exchange has broadened participation and is likely to foster more sustainable competition in the long run.

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Conclusion

While the regulatory shakeup initially rattled the derivatives segment, the market now appears to be adapting. Strategic shifts by traders and evolving product offerings are gradually restoring stability. However, sustained recovery will hinge on regulatory clarity and renewed investor engagement particularly from retail participants.

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