A new challenger to Nifty and Sensex? NCDEX launches two equity indices

The indices use a composite score comprising free-float market capitalisation (30%), average daily traded value (30%), beta (20%) and volatility (20%), as per the press release. The exchange's newly appointed CEO Vikas Goel said that the offerings solve the problem of the current headline indices - NSE’s Nifty 50 and BSE’s Sensex-focused on free-float market-capitalisation. We already have the Nifty and Sensex.

What is the gap in the market that NDEX and FINNDEX will fill? The Nifty and Sensex are essentially based on one parameter: free float market cap. Sometimes that does not reflect the reality of the market; the best proxy would be maybe volatility. That is a better proxy for what actually happens in the market. You can have a very large free float market cap component, but it is not very volatile. When we were constructing this index, that was our thought process: to have a proxy that reflects the market reality.

That's why the four parameters. There are no derivative contracts on these indices. When are we likely to see derivatives on these indices being launched? As it stands right now, it is not of much use to anybody except to study it and to be prepared as and when some products are launched. So in the cash market, the obvious products are ETFs and mutual funds, both. We are in discussion with several AMCs, and we are hopeful that they will launch cash market products, both ETFs as well as mutual funds on the index.

So that will give you, at least in the cash market, savers and passive investors one more option. We have back-tested it and compared it to other benchmarks over a five- and 10-year period; it outperforms. So, given where the markets are bottoming out, in a market going up there can be outperformance in ETFs which are linked to the index, compared to the comparable benchmarks. Until the derivative products on these indices are launched, a trader might think of beta and volatility being useful, but single stocks have to be traded.

So what is the likely liquidity you are seeing for that? Once we launch the cash market, in due course, with approval from SEBI, the second thing will be to get approvals for launching derivatives. The first thing to do will be futures and options on both the indices. So that is the intent. We are hopeful sometime next year that we will have the complete suite going. Obviously, as soon as we launch the cash market, we are trying our best to make sure that we have some products which people can use.

Then maybe two to three quarters is what we think it will take us, if everything goes well, to launch derivatives. That is the way we are looking at it. When will the indices be officially launched? We are looking at timelines for early next year. We are very hopeful that we should be in action in the first quarter of the next financial year. It is reported that one of the reasons the regulator wants to see liquidity in the cash products before giving final approval for derivatives.

What are you doing to bolster liquidity in the cash market? So, if you have seen our fundraise, our new investors, most of them are people who are already in this market. So they are committed to making sure that the launch is successful. Quite apart from that, we have already started talking about trying to get some direct listing. Along with that, we will obviously make sure that everything is permitted to trade and that there is adequate liquidity.

So I am at least certain on that part, from the viewpoint of the regulator, whether there will be adequate liquidity, we will make sure that there is adequate liquidity. Your indices will be calculated and maintained by the NSE Indices group. Why not do it yourself? We do not have an index company, and NSE Indices is a separate legal entity, so it is not competition. Second, if we do it on our own, we will not have sufficient liquidity, which will not impart liquidity to the index.

If I speak with the AMCs, it is easier for them to launch a product based on an index because they can hedge it off NSE prices, since we are taking prices from the NSE tick by tick to construct our index. So it is easier for everybody concerned. It is easier for people to launch products. So we have to be practical and recognise that initially, at least, we will not have liquidity. As we go along, I am very hopeful that we can, at a future date, maybe migrate to our own prices.

What is the bigger picture for NCDEX? If you want the big picture, overall our strategy is: I want my commodity guys to do equity, and we're onboarding equity guys and introducing them to every commodity. Because up until now, a lot of people made money in equity till 2024. They're struggling now. Then they found gold and silver and that has started struggling now. But during this time, agri commodities are doing very well.

If you look at the numbers, they are anywhere between 13% and 15% in the last four or five months. So what I'm saying is that it's a relevant asset class now to look at for people who are now basically tired of equity and tired of gold and silver. That was the grander plan: get commodity guys to do equity, get equity guys to do agri commodities, particularly.