Indian Markets Want High Frequency Algo Traders Back
Indian markets seemingly cannot do without high-intensity derivatives trading
On Episode 633 of The Core Report, financial journalist Govindraj Ethiraj talks to Madhavi Arora, Chief Economist, Emkay Global Financial Services.
SHOW NOTES
(00:00) Stories of the Day
(00:41) Indian markets want high frequency algo traders back
(03:52) Silver is now the preferred metal, even over gold
(04:45) Inflation hits six year low
(13:05) DGCA asks airlines to inspect fuel control switches of all Boeing aircraft
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday, the 15th of July, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes.
Indian markets are down, but they do want high-frequency algo traders back.
Silver is now the preferred metal, even over gold. Inflation hits a six-year low.
Where will it go next?
And the Director General of Civil Aviation asks airlines in India to inspect fuel control switches of all Boeing aircraft.
India's love for derivatives
Indian markets seemingly cannot do without high-intensity derivatives trading, it appears, and of course the revenue that the securities transaction tax brings. U.S. high-frequency trading giant Jane Street, which has been accused of market manipulation by Indian authorities, has deposited $567 million in an escrow account so it can resume trading in India.
The Securities and Exchange Board of India earlier disbarred the firm this month, something we discussed here, from buying and selling securities in the Indian market and put a freeze of $567 million of its funds, and it would be allowed to resume trading if an equivalent amount was deposited in an account that gave SEBI control over the money till its investigation was complete. SEBI says now the money has been transferred and it was examining the company's request that restrictions placed on it be lifted. A source told Reuters that the money was deposited in good faith, a source in the company that is, and the firm continues to contest the order and will send a formal response rebutting the allegation in coming weeks.
Jane Street told its staff earlier it plans to contest SEBI's allegations and that its practices were more akin to basic index arbitrage trading. Now, there is of course a problem here. Ashish Gupta of Access Mutual Fund, for instance, told Business Standard just yesterday that the Indian options market is disproportionately large compared to the cash market, with notional values reaching 400 times the cash market, up from low double digits a few years ago.
This growth, particularly on expiry days when low premiums create high leverage, suggests activity beyond hedging, as notional values should correlate with the underlying if used for hedging. Futures, for comparison, are only twice the cash market and stable. He should know.
He had flagged excesses in India's options market in his 2023 report called Gamification of Indian Equities, and he says that abundant liquidity and inexperienced investors have turned India's options market into a playground for global trading firms. As we discussed earlier as well, we literally have Uber drivers who've lost their entire annual income trading on the options market and at the same time some of the most sophisticated global algo traders making money. India represents about 60% of global options contracts despite being only 4% of the global market cap.
In contrast, Gupta told Business Standard that markets like the United States have stricter rules for retail participation in options trading and this open access here, combined with high retail activity, attracts high frequency trading firms trying to capitalize on liquidity and less sophisticated retail traders as we've seen. Meanwhile, India's equity indices were lowered amidst a bunch of things, including global queues as US President Donald Trump slapped a 30% tariff on imports from the European Union and Mexico starting 1st of August. First quarter results have started rolling and there is some nervousness, particularly with larger cap companies, including in IT.
The Sensex fell 247 points to close at 82,253. The Nifty 50 was down 67 points to close at 25,082. In the broader markets, the Nifty Mid Cap 100 and Small Cap Index did well and were up about 0.7% and 1.04%. Speaking of IT, HCL Tech on Monday reported a 10% fall in its Q1 FY26 consolidated net profit at about Rs 3,843 crores versus Rs 4,257 crores in the year-ago period.
Meanwhile, even as equity markets try and make up their mind on where to go, investors here are turning to silver, which is now trading near a 14-year high on Monday as its returns this year outpaced that of gold, according to a report in Reuters. Domestic prices have hit a record high of Rs 114,875, that's close to $1,335. A kilogramme, that is, as a production shortfall gave investors confidence that there could be a further rally.
Meanwhile, the rupee is still on a slightly weak wicket, going past Rs 86 per USD on Monday to its lowest level in more than two weeks, thanks to corporate dollar demand and equity-related outflows, according to traders who spoke to Reuters. The rupee closed at Rs 85.98 against the USD, down 0.2% from its close at Rs 85.80 on Friday.
Retail Inflation Is Down
India's annual retail inflation is now slowed to a more than six-year low of 2.1% in June, near the lower range of the Reserve Bank's tolerance band as food prices continue to fall.
This strengthens the case of further interest rate cuts, which makes the macroeconomic package more attractive. This 2.1% was lower than the 2.5% estimated by economists in a Reuters poll. Tell you something.
Food prices have been the main driver for slowing inflation this year, thanks also to adequate rainfall, which has pushed the output of agricultural goods. Inflation in food items, which accounts for nearly half of the retail inflation index, fell about 1% in June, from a roughly 0.9% increase in the previous month. Vegetable prices were down 19% year-on-year, compared to a 13.7% fall in May.
The headline in food inflation in June was the lowest since January 2019, according to the government's release. Food and beverage inflation was also down year-on-year. However, this was offset by a rise in egg prices, which was up about 2.5% in June versus 0.6% in May, and sustained inflation in oils and fats, and that's something we should return to later, about 18% year-on-year versus similar figures in May.
On a month-on-month basis, headline consumer price inflation has risen by about 0.6%. So prices of personal care and effects are growing, and we will come to that in a bit. Also, remember precious metals like gold prices were up 36% year-on-year in June, that's year-on-year again, and silver prices, which we just spoke of, were up about 18% year-on-year. Softer crude prices, healthy kharif sowings, and the forecast of an above-normal monsoon this year are key supportive factors, according to Ellara Capital.
Crude, incidentally, is quoting around $170 a barrel right now. I reached out to Madhavi Arora, Chief Economist at MK Securities, and I also began by asking her how she was seeing the current trends in inflation and whether we could continue to see these low rates that we are seeing right now.
INTERVIEW TRANSCRIPT
Madhavi Arora: See, the point is that when inflation obviously is much lower, there are two sides to it. One is the supply side, the other one is the demand side, right? Now, what's happening in the Indian context is that there are certain supply mismatches that you're seeing in, say, certain categories of food, which could be seasonal also in nature.
But broadly, when inflation tends to fall at a dramatic level, of course, it also sort of shows, to some extent, the underlying demand dynamics, which could lead to a much lower inflation than, say, you know, expected earlier. So, I think it's a blend of better supply management, better monsoons, which have led to a much better seasonal behaviour in perishable goods. But at the same time, part of it is also reflected in a relatively, you know, muted underlying growth story.
So, of course, to some extent, a lower inflation, if I look from a macro point of view, leads to a better purchasing power. It also artificially or statistically makes the real GDP growth look better, because we use deflators as a way to adjust against nominal growth. And of course, a much lower inflation will also imply that policymakers will also keep in mind that there are demand supply forces which are leading to a much lower inflation than their own mandate, which obviously could trigger a policy reaction function also in terms of further policy rate cuts.
But we'll see how it pans out. As of now, as I said, there are some seasonal factors which are also leading to these anomalies. But net-net, the knock-on effect for this is clearly the Reserve Bank reaction function getting the reset, because inflation is looking to be a much bigger reset this time around.
Govindraj Ethiraj: Right. And if you were to now look at the figures in the last few months, and given your understanding of how, let's say, food and vegetable prices have moved in the last year at the same time, do you think that we could see continuity in these levels of inflation, or could it suddenly start pinging?
Madhavi Arora: Oh, absolutely. So, we can even see sub-2% inflation in the next month. So, we have Monday prices for the last 11-12 days.
That's showing some increase in vegetable prices because seasonality is pretty much there. But still, you know, versus the past 2-3 years, the kind of seasonal increase we see in the month of June-July is much lesser. So, I think next month you would actually see an inflation trend which will be probably 1.8 or around those levels. So, sub-2% for sure. And as you go into the rest of the year, I think for the last part, we remain somewhere sub-3%, probably until November around that. And then we sort of head up towards 4%.
But for the whole year, I think, you know, we are in for a sub-3% kind of a figure.
Govindraj Ethiraj: Right. And this all obviously puts some pressure on the Reserve Bank to cut rates further. So, how are you seeing that part?
Madhavi Arora: See, when the RBI last revised the inflation forecast to 3.7% from above 4% that they had expected earlier, we were anyway expecting inflation to sort of undershoot their level. Inflation has actually undershot even our expectations. So, sitting today, we are looking at inflation at around 2.9% for the whole year, which is around 70-80 bps lower than RBI's estimate of 3.7%, which obviously will require a reset from RBI's end as well and a trigger, probably another rate cut. And as I said, the next 3-4 months are looking pretty comfortable as far as inflation dynamics are concerned. They undershot their earlier quarter's forecast by 20 bps. I think the rest of the year also would be close to 100 bps in terms of miss.
So, you know, lastly, probably a decent window for the Reserve Bank to actually trigger another set of rate cuts. We could even see two rate cuts coming our way further, depending on how the global dynamics play out. But I think the next policy itself could also be a possible move from the Reserve Bank of India.
But clearly, a big undershoot and I think the Reserve Bank is obviously keeping an eye on this. The only trigger or the real disruption that we can see on RBI's front could be on account of what's happening globally, which could probably come in the form of global disruptions, asset classes moves, which may not comfort the Reserve Bank. But otherwise, on domestic dynamics, this is a very good number for them to react again.
Govindraj Ethiraj: And last question. So how are you seeing or what would you advise companies, if so, in terms of how they would price their products? And I mean, overall, what kind of impact are you seeing on the consumer?
Madhavi Arora: Yeah, so I think you'll have to see it from both producer prices point of view and consumer price in front of you. If you see today's WPI inflation that has now gone into a negative territory. So we are again, that was a surprise.
Nobody's expecting it to get into a negative zone. So WPI inflation would probably be, you know, lingering close to one and a half or even lower than that for the whole year. While CPI inflation, as I said, would be lower than 3%.
But, you know, as I was mentioning in the early part of the discussion, that it's a blend of demand and supply. Somewhere the demand dynamics are also sort of driving this downturn in prices, which also implies that the producers may not have the same kind of bargaining power that probably they would have in a normal cycle. So somewhere that also will imply that they would be taking a margin hit or restrategizing their product pricing, because there is a demand shift that is happening in India.
And there's also an income effect, especially in the, you know, the upper middle income strata of the economy, which obviously requires them to again, restrategize their pricing as far as their goods are concerned. So I think there could also be sort of a margin hit that you would see in companies in terms of how they are sort of strategising their goods or pricing their goods.
Govindraj Ethiraj: Right. Madhavi, thank you so much for joining us.
Madhavi Arora: Thank you.
Airlines Are Inspecting Fuel Switches
The Ministry of Civil Aviation's Aircraft Accident Investigation Bureau released its preliminary report on the Air India Ahmedabad crash on Saturday, July 13, 2025.
That's the report that was released a month after the accident. The focus is now on the fuel control switches, which are next to the pilots, and they were switched off and on, causing the engines to stop, leading to the aircraft losing thrust, and then crashing. Now, while investigations are on as to what caused those fuel control switches to go off, airlines are already inspecting the mechanism of the switch.
Interestingly, in that report, which we spoke about over the weekend, both the Federal Aviation Administration and Boeing have told operators of airlines that the fuel switch locks on Boeing planes are safe. And like I said, that was a key takeaway of the report, which also has come in for a lot of criticism, because the inference of that report was seen to be towards pilot error rather than a technical failure. An Economic Times report said that India's DGCA has directed airlines to check all Boeing aircraft fuel switches locks by July 21.
So that instruction is to airlines operating most Boeing aircraft variants to complete checks on that locking mechanism. Etihad Airways has also asked their engineers to inspect the locking mechanism of that B787 aircraft, and according to media reports in the Economic Times and elsewhere, Singapore Airlines has apparently also started the process.
