How will index derivatives assist capital formation and growth in the economy?
At the larger level of the economy, well-functioning derivatives markets will improve the market efficiency of the underlying cash market. It will improve the market’s ability to carefully direct resources towards the projects and industries where the rate of return is highest; this will improve the allocative efficiency of the market. By improving the allocative efficiency, a given stock of investible funds will be better used in procuring the highest possible GDP growth for the country. Hence the real linkages go (a) from derivatives to market liquidity and market efficiency, and (b) from market efficiency to GDP growth.
