Futures Fair Value in Indian Markets

What futures fair value actually means

Futures fair value is the price a futures contract should trade at if there were no arbitrage left in the market. The idea is simple. If you can either buy the index or stock today in the cash market, or agree to buy it later through a future, both routes must cost the same once you account for the money you save or spend by waiting. The future therefore equals the spot price plus the cost of carry, which is the interest you would pay to fund the position minus the dividends you would have collected by holding the shares directly.

The standard formula used across Indian desks is Fair Value = Spot x [1 + (r - d) x (T / 365)], where r is the annual financing rate, d is the annual dividend yield of the underlying, and T is the number of calendar days to expiry. For a precise continuous version some traders use Spot x e raised to (r - d) x (T / 365), but for the short tenors of Indian monthly and weekly contracts the simple version above is close enough that the difference is a rounding error.

The key correction many beginners need is this. Fair value is not a forecast of where the index will be on expiry. It is purely an arbitrage relationship for today. If Nifty is at 24,800 now, the fair value of its monthly future does not say Nifty will rise to 24,910. It says that, given today's spot and today's interest rates, the future is fairly priced at 24,910 right now, and that number drifts down toward spot every single day as expiry approaches and the carry shrinks to zero.

The Indian inputs: repo rate, financing rate and dividend yield

The single most common error in older fair value examples is plugging in a made up interest rate. In the Indian context the rate is not abstract. The RBI repo rate is the policy anchor, and as of June 2026 it stands at 5.50 percent after the Reserve Bank of India cut it by 50 basis points in its June 2026 policy. The repo rate is what the RBI charges banks for overnight funds, so it sets the floor for the cost of money in the system.

However, the rate that actually goes into the carry formula is the rate at which a trader can borrow money for the life of the contract, not the repo rate itself. In practice that is the short-term money market rate, such as the Treasury bill yield or MIBOR, which usually sits a little above repo. A reasonable working figure in mid 2026 is around 6.5 to 7 percent. In the worked example below we use 6.7 percent so the maths reflects a realistic financing cost rather than the bare policy rate.

The dividend leg matters too. For the Nifty 50 index the trailing dividend yield is roughly 1.2 to 1.4 percent. For an individual high payout stock it can be far higher, and dividends are lumpy. If a stock goes ex-dividend during the contract month, the future will already have priced that drop in, which is why a single stock future can trade at a visible discount to spot right before a large dividend.

Worked example: Nifty 50 monthly future fair value

Take a real-looking snapshot. Nifty 50 spot is 24,800. The monthly future has 30 calendar days left to its expiry. We use a financing rate of 6.7 percent and a Nifty dividend yield of 1.3 percent. Plugging into the formula, the net carry rate is 6.7 minus 1.3, which is 5.4 percent per year. Over 30 days that is 5.4 percent x (30 / 365), which is about 0.4438 percent.

So Fair Value = 24,800 x [1 + 0.004438] = 24,800 x 1.004438, which comes to roughly 24,910. The fair basis is therefore about 110 points above spot. With the Nifty lot size of 65, that 110 point basis is worth 110 x 75, which is Rs 8,250 of carry baked into one lot of the monthly future. These figures are illustrative and move with live prices and rates.

Reading the basis: premium, discount and what it signals

Once you know fair value you can read the live basis as a signal. If the Nifty future is trading at 24,950 when fair value is 24,910, the future carries a 40 point premium over fair value, which usually reflects bullish positioning and strong demand for long exposure. If instead the future trades at 24,860, below the 24,910 fair value, that discount often signals heavy short hedging or bearish sentiment, and is common during sharp sell-offs when index futures dip below spot.

Stock futures tell a similar story. A persistent discount in a single stock future is frequently a dividend effect or a sign that holders of the stock are shorting the future to hedge. A widening premium in the days before a derivatives expiry can flag a roll squeeze, where traders are paying up to carry long positions into the next series. None of this is a crystal ball, but reading the basis against fair value tells you far more than the raw futures price alone.

• Future above fair value: premium, generally bullish positioning and long demand.
• Future below fair value: discount, often bearish hedging or a pending dividend on a stock.
• Basis shrinks predictably as days to expiry fall, regardless of direction.
• On expiry day the future and the underlying settle to the same value, so basis is zero.

Cash and carry arbitrage in Indian markets

When the future trades meaningfully above fair value, the textbook trade is cash and carry arbitrage. You buy the basket of shares in the cash market and sell the overpriced future, then hold both to expiry where they converge, locking the gap as profit. The reverse, called reverse cash and carry, applies when the future is well below fair value, but it needs the ability to short the cash leg, which retail traders in India usually cannot do beyond intraday.

For a single stock it is cleaner to illustrate. Suppose Reliance Industries cash is at Rs 1,400 and its near month future, which has a lot size of 500, is trading at Rs 1,420 when fair value is only Rs 1,410. The future is Rs 10 rich. You buy 500 shares for Rs 7,00,000 and sell one future at Rs 1,420. At expiry both settle near the same price, so you capture roughly the Rs 10 gap, which is 10 x 500, or Rs 5,000 gross per lot, illustrative only.

The gross number is the trap. After you pay Securities Transaction Tax, exchange transaction charges, SEBI fees, stamp duty, GST on the charges, and the financing cost of locking up Rs 7,00,000 for a month, plus brokerage on the cash and the futures legs, a Rs 10 edge is usually eaten alive. This is exactly why pure arbitrage is dominated by institutions and arbitrage funds with low costs, and why the basis rarely strays far from fair value for long. For most individual traders, fair value is best used as a read on sentiment, not a free profit machine.

Expiry mechanics: weekly and monthly contracts

Fair value depends on time to expiry, so you must know the schedule. Index futures in India are monthly and expire on the last Tuesday of the contract month, or the previous trading day if that Tuesday is a holiday. Three monthly contracts trade at any time, the near, next and far month. There are no weekly futures, only weekly options, so for futures fair value the relevant clock is always the monthly expiry.

Weekly expiries do matter for the options world that sits alongside futures, and SEBI has tightened that space. Following SEBI's 2024 and 2025 reforms, each exchange now offers weekly options on only one benchmark index, so Nifty weekly options run on NSE and Sensex weekly options run on BSE, while contracts such as Bank Nifty and FinNifty moved to monthly only expiries. SEBI also raised minimum contract values and removed calendar spread margin benefits on expiry day, all aimed at curbing speculative churn. For a futures fair value calculation though, you only ever count days to the monthly settlement.

Common mistakes when calculating fair value

The biggest mistake, and the one this page is correcting, is using an invented interest rate with no link to reality. Anchor your rate to the live RBI repo of 5.50 percent and the money market rate just above it, not a round number pulled from a textbook. The second common error is ignoring dividends, which matters most for high yield stocks and around ex-dividend dates, where the future will sit at a discount that is correct, not a mispricing.

A third trap is counting trading days instead of calendar days. Interest accrues every calendar day, including weekends and holidays, so T must be calendar days to expiry. Finally, traders forget that fair value is a moving target. As the financing rate changes with RBI policy, or as days to expiry fall, the fair value updates continuously. A number you calculated last week is stale this week.

• Using a made up rate instead of one anchored to the 5.50 percent repo and live money market rates.
• Ignoring dividends, especially around ex-dividend dates on single stocks.
• Counting trading days rather than calendar days for T.
• Treating fair value as a price forecast rather than a same-day arbitrage relationship.
• Forgetting that the basis must decay to zero by expiry.

How fair value feeds into taxes and your trading journal

Fair value is a pricing tool, but the money you make trading futures has clear tax treatment in India. Profits and losses from futures and options are treated as business income, not capital gains, and are taxed at your applicable slab rate. This is different from delivery equity, where short term capital gains are taxed at 20 percent and long term gains above Rs 1.25 lakh are taxed at 12.5 percent. Because F&O is business income, you can set off losses and carry them forward under the relevant rules, and a tax audit may apply depending on turnover.

This is where disciplined journaling pays off. If you trade the basis, roll positions across expiry, or run cash and carry style hedges, recording the spot, the future, your assumed fair value and your real costs lets you see whether your edge survived after STT, brokerage and GST. Over a year that record is also what makes the business income filing and any audit straightforward, rather than a scramble through broker contract notes. Logging the gap between your expected fair value and the actual fill is one of the cleanest ways to learn whether the market agreed with your read.

Sources and further reading

For authoritative data and current contract specifications refer to NSE India for lot sizes and expiry calendars, the Reserve Bank of India for the live repo rate and money market rates, SEBI for derivatives regulations, and Zerodha Varsity for worked tutorials. Always confirm current rates, lot sizes and contract specifications on the official source before you trade. All figures here are illustrative and never a promise of returns.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to NSE India, Reserve Bank of India and Zerodha Varsity. Always confirm current rules, rates and contract specifications on the official source before you trade.