This study examines the nature and extent of relation between NSE-50 Futures and volatility of S&P CNX Nifty. It uses Granger causality test to study relationship between volatility and futures market activity. The sample data consisted of daily closing prices of S&P Nifty and turnover from June 12, 2000 through March 25, 2004 for near month and from June 12 through January 29, 2004 for middle month and far month contracts. The empirical evidence suggests that futures market activity destabilizes the underlying market. The direction of causation is bi-directional in case of near month; however, causality runs from Nifty Futures to volatility of S&P Nifty in case of far month contract.

Financial liberalization started in '90s in India. This liberalization has two components deregulation and introduction of new instruments in the markets as a part of capital market reforms. These reforms were aimed at enhancing competition, transparency, and efficiency in the Indian financial market. One decade of reforms has brought a major transformation and structural change during this period like electronic trading instead of floor-based trading, abolition of `Badla' transaction and introduction of `rolling' settlement to improve cash market operation and new financial products like derivatives, exchange-traded funds and hedge funds. The reforms process has helped to improve information dissemination without much delay, transparency and to curb unfair trade practices. Equity derivatives in India were introduced as a part of capital market reforms to hedge price risk. This was initiated by the Government of India through L C Gupta Committee Report. The L C Gupta Committee on Derivatives had recommended in 1997 its introduction in a phased manner. Accordingly, stock index futures were introduced on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in the first. BSE was the first stock exchange in the country, which commenced trading in index futures based on BSE Sensex on June 9, 2000. Immediately, thereafter, on June 12, 2000, NSE introduced its trading based on S&P CNX Nifty. Subsequently, later on, other products like stock futures on individual securities were introduced in November 2001. This was followed by approval of trading in index options based on these two indices and options on individual securities. Trading on the derivatives segment of NSE and BSE has witnessed a moderate turnover in past three and half years.