Understanding SGX Nifty: Indian and Singapore Derivative Markets for Investors

Last Updated : Sept. 15, 2023, 5:01 p.m.

SGX Nifty, also called the Singapore Nifty, is a derivative product that allows investors to speculate or hedge their positions on the direction of the Indian stock market. It derives its name from the “Nifty 50,” the flagship stock index of the National Stock Exchange of India (NSE) consisting of the 50 most liquid and large-cap Indian shares. SGX Nifty futures are listed and traded on the Singapore Exchange (SGX), exposing investors to the Indian equity market even if the NSE is closed.

What is SGX Nifty?

SGX Nifty, or the Singapore Nifty, is a derivative product designed to track the performance of the Nifty 50 index, India’s benchmark stock index. It operates as a  futures contract traded on the Singapore Exchange (SGX). This financial device allows traders to speculate or hedge towards the future movements of the Nifty 50 index.

SGX Nifty futures contract represents an agreement between two parties to shop for or sell the Nifty 50 index at a predetermined price on a specific date. Traders can take long positions if they anticipate the index’s rise or short positions if they assume it to decline.

One of SGX Nifty’s unique features is its trading hours, which expand beyond the Nifty 50’s regular trading hours on the National Stock Exchange of India (NSE). This feature appeals to international investors in different time zones who need exposure to the Indian market without barriers imposed by market hours. Additionally, SGX Nifty’s future behaviour before the NSE opens can provide insights into market sentiment and influence the Nifty 50’s  direction.

What is the Importance of SGX Nifty?

The significance of SGX Nifty extends beyond its role as a derivative product tracking the Nifty 50 index. Its importance lies in its ability to provide global investors with particular advantages and opportunities in navigating the Indian stock market and managing their investment portfolios. Here are the various key reasons that define why SGX Nifty holds key importance:

Extended Trading Hours

One of the critical reasons for SGX Nifty’s importance is its extended trading hours. While the National Stock Exchange of India (NSE) operates during specific Indian market hours, SGX Nifty futures trading continues even after the NSE closes. This is a boom for international traders in unique time zones who may struggle to actively participate in the Indian trading session. The extended hours allow them to react to global events and news that could impact Indian markets.

Global Access to the Indian Market

SGX Nifty is a gateway for international traders to access the Indian equity market. This is especially critical for foreign institutional buyers (FIIs) and different international players who could face regulatory restrictions or practical problems directly participating in the Indian stock market. SGX Nifty lets them gain exposure to India’s financial growth and diversify their portfolios.

Hedging and Risk Management

Another important component of SGX Nifty’s role is risk management. Institutional investors and portfolio managers can use SGX Nifty futures to hedge their exposure to Indian stocks. By taking positions in SGX Nifty futures contracts that align with their present holdings, they can offset potential losses resulting from adverse marketplace movements. This strategy is useful during times of heightened market volatility.

Market Sentiment Indicator

SGX Nifty’s behaviour often provides insights into market sentiment and expectations regarding the Nifty 50 index’s performance. Investors worldwide closely monitor SGX Nifty’s pre-market movements to gauge the probable direction of the Indian stock market when it opens. This indicator can affect trading decisions and portfolio strategies.

Arbitrage Opportunities

Business people and traders often engage in arbitrage by exploiting price discrepancies between SGX Nifty future and the Nifty 50 index. If there is a significant difference between the two, buyers can capitalise on these divergences by simultaneously buying in one market and selling in the other. This contributes to market efficiency and price convergence.

Globalisation of Financial Markets

SGX Nifty exemplifies the increasing interconnectedness of global financial markets. It showcases how investors from one part of the world can access and trade in other markets, bridging geographical gaps and time zones. This globalisation trend enhances market liquidity and efficiency.

Conclusion

SGX Nifty is useful in providing global investors with exposure to the Indian equity market, offering extended trading hours, hedging opportunities, and a platform for speculation. Its importance extends beyond its role as a derivative product; it indicates market sentiment and impacts the opening direction of the Nifty 50 index at the NSE. As global financial markets continue to integrate, products like SGX Nifty contribute to the global interconnectedness of stock exchanges and offer investors diverse avenues for portfolio management and risk management strategies.

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