It is important to allow markets to give their natural signal

Trader, academic, advisor, and regulator — Ananth Narayan Gopalakrishnan has established a versatile career spanning over 30 years in the financial sector. While his domain expertise covers global macro trading and public policy, his recent tenure as a Whole-Time Member of SEBI was particularly noted for its focus on market integrity and transparency. During his tenure at SEBI , he oversaw critical interventions, including the detailed public disclosure regarding the Jane Street trading probe and the publication of comprehensive data highlighting the financial risks faced by retail investors in the F&O segment. While there are quite a few like him who know market plumbing inside out, there are fewer like him with the ability to explain these complex concepts in a lucid way that anyone can grasp. Speaking to businessline, he shares his current perspectives on many aspects relating to financial markets and the economy today. Excerpts:

On F&O, let me start with the larger picture. Derivative markets, including speculation, play a crucial role in price discovery, market depth and providing hedging mechanisms to market participants.

That said, SEBI identified three distinct concerns around the state of our F&O market, starting with its first consultation paper around July 2024.

The first was investor protection. As you point out, around 90 per cent of individual traders were losing money, and the number remains exceptionally high. When around one crore individuals participate in a market where nine out of ten lose money, with an average loss of around ₹1.2 lakh per individual, that must concern a regulator whose primary mandate is investor protection.

The second concern was market integrity and stability around index-option expiry days. On some expiry days, equivalent volumes in index options were 700–800 times the volumes in the underlying cash market.

More strikingly, market-wide open interest in index options continued to increase right up to around 3:15 p.m. on expiry day. Imagine an extreme external shock occurring at 3:15 p.m. on such a day, with derivative exposures many hundreds of times the underlying cash-market volumes. The potential spillovers could be significant and pose risks to market stability.

There was also a market-integrity concern, given the settlement outcome of a very large derivatives market is determined by prices in a much smaller underlying market. There are some parallels with the vulnerabilities that became apparent in the LIBOR rate-setting scandal.

The third concern was the extremely short tenure of our F&O contracts. A healthy derivatives market ideally has substantial activity in contracts extending beyond a month, consistent with their role in both trading and hedging.

In India, activity had become overwhelmingly concentrated in very short-dated contracts, particularly weekly index options. On expiry day, these effectively become zero-day-to-expiry, or 0DTE, options.

Research suggests that 0DTE options can, under certain circumstances, amplify rather than dampen intra-day volatility.

Because there was another side to the argument that SEBI had to consider. Markets are complex, and regulators must be careful about large interventions, particularly in markets involving willing buyers and sellers. Even actions taken with the best intentions can have unintended consequences. Unless there is a serious market failure requiring immediate action, there is merit in proceeding thoughtfully, based on data and consultation.

There was also a practical consideration. Exchanges, clearing corporations and brokers derived a significant proportion of their revenues from derivatives, particularly index options. A drastic intervention could therefore have produced a substantial shock across an interconnected market ecosystem. The objective was not to protect those revenues. The concern was what such a shock might do to liquidity, market-making, the cash market and the sentiment in the wider ecosystem.

That is why SEBI chose a calibrated approach. The first consultation paper was issued in July 2024, followed by extensive and candid discussions with market participants. Those consultations were substantive, not procedural. Several of the suggestions and concerns raised by stakeholders were incorporated into the final measures introduced in October 2024. These measures, among other things, sharply reduced the number of weekly index-option expiries.

We then assessed the impact of those measures before issuing another consultation paper in February 2025, aimed at further reducing the risks of manipulation and market instability. Again, the consultation process resulted in useful inputs and modifications, many of which were reflected in the final measures implemented in May 2025. So, the approach was deliberately data-driven, consultative and incremental. I believe that was the appropriate approach.

The latest SEBI research, however, shows that some of the concerns we were grappling with have not disappeared. That does not automatically tell us what the regulatory response should be. But it does suggest that the issue merits renewed deliberation.

The appropriate approach, in my view, is the same one as before: examine the new evidence carefully, assess the impact of the measures already taken, consult stakeholders and experts, and then consider whether any further measures are warranted.

I would put a few ideas on the table for discussion rather than prescribe any single solution.

First, the latest SEBI research suggests some moderation in individual participation but also shows that a significant proportion of those losing money in F&O have little or no underlying equity holdings. Many enter by buying options for relatively small amounts and trying to exit quickly at a profit.

This raises questions of suitability and appropriateness. Several jurisdictions have safeguards to ensure that those trading complex derivatives understand the risks and have the financial capacity to bear losses. India already has such requirements; there may be merit in examining whether they need to be strengthened.

In this context, there is a broader institutional issue. Exchanges, clearing corporations and depositories perform important quasi-regulatory functions, but are also competing commercial entities. There is merit in debating whether some regulatory and market-wide risk-management functions should eventually be housed in a separate, not-for-profit entity, insulating them more clearly from commercial considerations.

Second, we should try to deepen the underlying cash market. Strengthening the Securities Lending and Borrowing Mechanism, which facilitates short-selling, arbitrage and market-making, is worth debating.

Third, if we want to encourage longer-tenure derivatives, we should examine whether margin requirements can be rationalized for such contracts, particularly for spread and basis trades where the underlying economic risk can be considerably lower.

Let us look at the broader context. In FY26, to facilitate monetary-policy transmission, support credit growth and address tight banking liquidity, the RBI purchased ₹8.8 lakh crore of government securities through OMOs — equivalent to around 84 per cent of the Centre’s net market borrowing. This brought down yields sharply, but also had consequences for savings, capital flows and the rupee. With yields low, domestic savings increasingly flowed into equities even as banks struggled to attract term deposits. Meanwhile, amid pockets of high equity valuations, net foreign portfolio flows into equities remained weak.

More importantly, narrow interest-rate differentials between India and global markets made it cheaper to buy dollars forward. This encourages hedgers and speculators to buy rather than sell dollars forward. Lower relative returns in India also encouraged HNIs to look for opportunities overseas.

Across FY25 and FY26, the RBI sold around $192 billion in the spot and forward FX markets. By my estimates, only around $75 billion can be explained by the current-account deficit and net FDI and FPI flows. Much of the remaining roughly $117 billion appears to reflect hedging and other financial demand for dollars, encouraged by narrow interest-rate differentials.

These forces can become self-reinforcing: dollar buying weakens the rupee, which can generate expectations of further depreciation and additional dollar buying. The rupee consequently depreciated rapidly, reaching around 92.5 by February, even before the Iran situation emerged.

It was against this backdrop that the RBI introduced the FCNR(B) swap facility. At the time, the five-year market swap rate was around 3 per cent per annum. Put simply, if the spot dollar was ₹95, the five-year forward rate would have been around ₹110. Instead, under the facility, the RBI effectively offered to sell the dollars back after five years at ₹95 — at zero forward premium. Relative to market pricing, this represented an economic concession of around 3 per cent annually, or roughly 15 per cent over five years. On the roughly $127 billion of five-year FCNR(B) deposits, I estimate its present value at around $14-15 billion.

That value is being realized across three sets of participants. NRIs are earning dollar returns of around 6-6.25 per cent, substantially higher than before the facility, and potentially much higher through leverage. Foreign banks providing such leverage earn a spread over their funding costs. Indian banks receive five-year INR funding at around 6.5 per cent, without SLR, CRR or priority-sector-lending requirements, which they can deploy profitably, including into government securities.

So, if participants are realising a substantial economic benefit from the concession, there must be a corresponding direct or indirect economic cost somewhere in the system. There is no free lunch.

The direct and indirect costs are likely to be diffused across the system and in different forms. Much depends considerably on what the RBI does with the dollars it receives and the corresponding rupee liquidity. If the RBI retains and invests the dollars, the rupee liquidity may need to be absorbed. If it uses Variable Rate Reverse Repos, there is a rupee interest cost. If it sells some of its government bonds, there is an opportunity cost. If the Market Stabilization Scheme is used, the Government bears the interest cost; if CRR is increased, banks bear an opportunity cost. Alternatively, the RBI could sell some of the dollars and buy them back forward at market rates, in which case the cost of the zero-premium swap becomes more explicit. It could also sell the dollars outright in the spot market. But since it has committed to returning dollars to the banks five years later, that would leave the RBI with an open foreign-exchange exposure and therefore some currency risk. In practice, we are likely to see some combination of these approaches over the five-year period.

Overall it is best seen as a direct and indirect economic cost of an intervention designed to achieve broader monetary and foreign-exchange objectives. The relevant question is whether those benefits justify the concession and its direct and indirect costs. That assessment can only really be made over time.

There is also an important consequence. Banks have received a very large pool of five-year rupee funding at around 6.5 per cent. Without this, they would presumably have had to compete more aggressively for domestic deposits. The facility could therefore keep deposit and other rupee interest rates lower than they might otherwise have been, with domestic savers bearing some of the opportunity cost.

Agree that we should not attribute FPI outflows simply to taxation. Global investors look at expected returns after adjusting for growth prospects, valuations, interest rates, currency risk and taxes. When US Treasury yields are close to 5 per cent, the hurdle rate for investing elsewhere naturally rises. If Indian equities are relatively expensive and the rupee is under pressure, that hurdle rises further. That said, addressing FPI taxation is one area where we can improve our competitiveness.

There is a related domestic issue. Comparable financial assets receive very different tax treatment. Debt is disadvantaged relative to equity, while interest is taxed at marginal rates even though part of the nominal interest merely compensates savers for inflation. For domestic savers, taxation should be reasonably low and neutral between comparable financial assets. Investment decisions should primarily reflect risk and return, not tax arbitrage. This combined with financial repression has had the unintended consequence of pushing up equity valuations which has the unintended consequence of keeping out both net FPI and FDI.

My preference is for less distortion of the price of money. It is important to allow markets to give their natural signal. The RBI’s ₹8.8 lakh crore of bond purchases in FY26 helped lower long-term yields substantially. There were valid monetary-policy and liquidity objectives behind those interventions, but such large interventions also affect savings allocation, capital flows and the currency. Over time, I would prefer greater market determination of interest rates, combined with a tax regime that does not disadvantage fixed-income savings, while keeping rates low for our borrowers. That would address the underlying distortions more directly.

At least so far, the data do not suggest that another fiat currency is in a position to replace the US dollar. The BIS triennial survey continues to show the dollar on one side of close to 90 per cent of global foreign-exchange transactions. The euro is a distant second, and the renminbi and other currencies remain much smaller. There is an important distinction, however, between the dollar losing some of its dominance and the dollar being replaced. The former is already happening at the margin; the latter is much harder to envisage.

The US clearly has serious fiscal challenges. But the uncomfortable reality is that no other major currency has yet emerged as a more credible alternative at sufficient scale, with the combination of deep and liquid financial markets, convertibility, institutional credibility and rule of law that a global reserve currency requires.

What we are seeing instead is diversification. Central banks have gradually reduced the dollar’s share in their reserves, while increasing allocations to gold and, to a lesser extent, other currencies. Geopolitical tensions, trade conflicts and the demonstrated possibility of foreign reserves being frozen have added to the incentive to diversify.

That matters for the US Treasury market. If some traditional official buyers become less willing to absorb incremental US debt, that debt has to find other buyers. Private investors will buy it, but they will demand an appropriate return, particularly when US fiscal deficits are large, Treasury issuance is heavy, and there is competing demand for capital from the private sector, including the enormous investment requirements of AI and hyperscalers.

The recent rise in US Treasury yields is therefore a warning signal. My hope is that a 10-year yield around 5 per cent helps bring fiscal sustainability back into the political debate.

Sometimes markets impose discipline where politics has postponed difficult choices. But there is a risk that things get worse before they get better. A sustained rise in US long-term yields can transmit stress across virtually every major financial market in the world.

Published on September 12, 2026