Cash and Carry Arbitrage in Indian Markets: Deliverable Stock Futures, Cost of Carry and a Worked Example

What Cash and Carry Arbitrage Actually Is

Cash and carry arbitrage is a fully hedged trade. You buy a stock in the cash (spot) market and at the same instant sell one lot of that stock's futures at a higher price. You then hold, or carry, the shares until the futures contract expires. On the last Thursday of the expiry month the futures price converges to the spot price, and because Indian single-stock futures now settle by physical delivery, you simply hand over the very shares you bought. The gap you locked in on day one becomes your gross profit. There is no view on direction. Whether the stock rises or falls, your long shares and short futures cancel out, and you keep the spread.

The reason a gap exists at all is the cost of carry. A futures price is, in theory, the spot price plus the cost of holding the asset until expiry, mainly the interest on the money tied up, minus any dividend the stock pays before expiry. When the actual futures price trades above that fair value, the futures are richer than they should be, and an arbitrageur can lock the difference. The whole skill of this trade is being honest about your own cost of carry. If the market premium is smaller than your true financing and transaction cost, there is no arbitrage, only a slow loss dressed up as a clever idea.

This is why the trade is sometimes called cash-futures basis capture. The basis is the difference between the futures and the spot. In a normal, contango market for a non-dividend month the basis is positive and roughly equal to the interest cost of carrying the shares. You are effectively lending money to the market by buying the stock cheap and selling the future dear, and the basis is your interest. That framing matters because it tells you the natural ceiling on returns. You cannot earn more than the market's short-term financing rate from this trade, minus your costs, and usually a good deal less.

Why You Cannot Do This on Nifty or Bank Nifty

This is the single most important correction to make. Nifty, Bank Nifty, FinNifty and Sensex futures are cash settled. There is no basket of shares to deliver and no underlying you can physically buy and carry one for one against the future. You cannot buy the Nifty index. You could try to buy all fifty constituent stocks in their exact index weights, but that is index arbitrage, a different and far more capital-heavy operation requiring you to replicate and continuously rebalance the basket, manage fifty separate dividend events, and handle the index reconstitution. It is the domain of large institutional program-trading desks, not a retail cash and carry trade.

True cash and carry arbitrage, the kind a retail or proprietary trader actually runs, is done on single deliverable stocks that have liquid futures, such as Reliance Industries, HDFC Bank, TCS, Infosys, ICICI Bank or State Bank of India. With a single stock you buy exactly the number of shares in one futures lot, you carry those specific shares, and at expiry you deliver them against your short future. One instrument, one hedge, one clean settlement. Any worked example for this strategy that uses the Nifty index is therefore structurally wrong, because the leg you would need to carry does not exist as a deliverable asset.

The Cost of Carry, With a Real Rate

Fair value of a stock future is calculated as Futures fair value = Spot price multiplied by (1 plus r multiplied by t) minus expected dividends, where r is your annual financing rate and t is the time to expiry as a fraction of a year. The rate r is not a mystery. For a retail trader funding the share purchase, it is your broker margin funding or margin trading facility rate, commonly 12 to 18 percent a year in India. For someone deploying their own idle cash, r is the opportunity cost, perhaps a liquid fund or money-market yield of around 6 to 7 percent. Institutional desks borrow far cheaper, often near the call money or treasury bill rate of 6 to 7 percent, which is precisely why they can profit from spreads that are too thin for a retail trader.

Time to expiry matters enormously because the carry is a per-year figure. A 1 percent gross futures premium captured over a 30-day holding period annualises to about 12 percent, which can beat a 12 percent funding cost only barely, before costs. The same 1 percent premium over a 7-day weekly-style horizon annualises to roughly 52 percent, which looks fat, but stock futures trade in monthly cycles, so you are usually locking a near-month premium and carrying for the full remaining days to the last-Thursday expiry. Always convert the premium to an annual yield before you decide, then subtract your own r and all transaction costs.

A Fully Worked Example on Reliance

These numbers are illustrative and chosen to show the method, not to predict any real price. Say Reliance Industries trades at a spot price of Rs 2,900 per share. The current-month future, with 20 calendar days to the last-Thursday expiry, trades at Rs 2,920. The single-stock futures lot size is 500 shares. There is no dividend ex-date before this expiry. The gross premium is Rs 2,920 minus Rs 2,900, which is Rs 20 per share, or a gross spread of Rs 10,000 on one lot of 500 shares.

First check the carry. A Rs 20 premium on a Rs 2,900 spot is about 0.69 percent for 20 days. Annualised that is roughly 0.69 percent multiplied by 365 divided by 20, which is about 12.6 percent a year. So this gap only rewards you if your financing cost r is below 12.6 percent. A trader using broker margin funding at 15 percent would actually lose on carry alone here. A trader deploying own cash at a 6.5 percent opportunity cost keeps the difference. Let us run it for the own-cash trader, who ties up roughly Rs 2,900 multiplied by 500, which is Rs 14,50,000 of capital plus the futures margin.

• Gross locked spread: Rs 20 per share multiplied by 500 shares equals Rs 10,000.
• Own-cash carry cost for 20 days at 6.5 percent on Rs 14,50,000: about Rs 14,50,000 multiplied by 0.065 multiplied by 20 divided by 365, which is roughly Rs 5,164.
• Brokerage: assume a flat Rs 20 per order, four legs in total (buy cash, sell future, and at expiry the delivery plus futures settlement), so about Rs 60 to Rs 80. Use Rs 80.
• STT: on the cash buy there is no STT on purchase for delivery, but at expiry physical delivery is treated like a delivery trade and STT of 0.1 percent applies on the delivery value of about Rs 14,60,000, which is roughly Rs 1,460. On the futures sell leg STT is 0.02 percent of about Rs 14,60,000, roughly Rs 292.
• Exchange transaction charges, SEBI fees, stamp duty and 18 percent GST on brokerage and charges: budget a combined Rs 400 to Rs 600 across legs. Use Rs 550.

Total costs are roughly Rs 5,164 carry plus Rs 80 brokerage plus Rs 1,460 plus Rs 292 STT plus Rs 550 other charges, which is about Rs 7,546. Net gross profit before tax is Rs 10,000 minus Rs 7,546, which is about Rs 2,454 on one lot. That is a pre-tax return of roughly 0.17 percent on the Rs 14.5 lakh deployed over 20 days, or about 3.1 percent annualised. Now apply tax. F and O profit is business income, so it is taxed at your slab, and gains on this hedged trade fall under the new short-term-style treatment for equity-linked business activity. If we apply a representative effective tax of about 20 percent plus 4 percent cess on the Rs 2,454, tax is roughly Rs 510, leaving a net of about Rs 1,944.

Step by Step: How to Execute the Trade

Execution must be simultaneous, because the spread can vanish in seconds. Most arbitrage desks use a two-leg basket or a pair order so both legs fire together. A retail trader doing it manually should place the cash buy and the futures sell within the same few seconds, ideally on a stock with deep order books like Reliance, HDFC Bank or ICICI Bank, where slippage on 500 shares is small. Never leg in one side and hope the other improves, because that turns a hedged arbitrage into an unhedged directional bet.

• Confirm the future is on a deliverable single stock, not a cash-settled index.
• Check the exact current lot size on NSE and confirm no dividend ex-date falls before expiry.
• Compute fair value with your own r and compare it to the live futures price. Only act if the premium clears your carry plus costs with a margin of safety.
• Buy exactly one lot worth of shares in the cash market for delivery, and sell one futures lot at the same moment.
• Hold both legs to expiry. Do not unwind early unless the basis collapses to where exiting both legs nets more than carrying to expiry.
• At expiry, give physical delivery of your shares against the short future and let the position settle.

Physical Settlement and SEBI Rules

Since SEBI phased in compulsory physical settlement for all stock derivatives, every single-stock futures position open at expiry settles by actual delivery of shares, not cash. For a cash and carry arbitrageur this is a feature, not a bug. You already hold the exact shares, so at expiry you simply deliver them against your short future and the trade closes with no convergence risk and no need to sell in the open market. This is precisely why the strategy is clean on stocks and impossible on indices. The deliverable underlying is the hedge.

Be aware of the practical consequences of physical settlement. Your broker will demand the full delivery margin in the days leading up to expiry, typically ramping up across the last week, so you must have either the shares in your demat or the cash to fund delivery. If you fail to honour delivery obligations, exchanges levy steep penalties and auction charges. For a properly run cash and carry trade this is never an issue, because you bought the shares on day one and they sit in your demat ready to deliver. The risk only appears for traders who try to hold naked single-stock futures into expiry without the underlying.

Costs, Taxes and Margins in Detail

Costs are not a footnote in arbitrage, they are the deciding factor. The cash buy for delivery attracts no STT on purchase, but the futures sell leg pays STT of 0.02 percent on the sell value, and at expiry the physical delivery is taxed like a delivery trade with STT of 0.1 percent on both sides of the delivered value. On top of that sit exchange transaction charges, the SEBI turnover fee, stamp duty on the buy side, and 18 percent GST on brokerage and on the exchange and SEBI charges. None of these are large individually, but on a thin spread they add up fast, which is exactly why this example netted under 0.2 percent before tax.

On tax, profits from futures and options in India are treated as business income, not capital gains, and are taxed at your applicable slab rate. The headline equity short-term capital gains rate of 20 percent and the long-term rate of 12.5 percent above Rs 1.25 lakh apply to delivery-based equity capital gains, not to your F and O leg. Because a cash and carry trade combines a delivery equity leg and a business-income futures leg, careful accounting matters, and most active arbitrageurs simply report the whole activity as business income. Maintain clean records of every leg, because the audit and reporting requirements for F and O turnover are stricter than for ordinary delivery trades. Consult a tax professional for your specific situation.

Risks That Are Easy to Underestimate

The biggest risk is not price, it is carry cost mispricing. Traders see a Rs 20 premium and read it as Rs 10,000 of free money, forgetting that financing 14.5 lakh of stock for three weeks at a 15 percent margin rate can cost more than the spread. The second risk is dividends. If the stock goes ex-dividend before expiry, the futures price already reflects the expected dividend and the basis shrinks or even turns negative, so a premium that looked attractive may simply be the market pricing in a payout you will receive as the share holder. Always check the ex-date before assuming a gap is mispricing.

Other practical risks include execution slippage if you fail to fill both legs together, margin calls as physical-delivery margins ramp up near expiry, and liquidity in less-traded stock futures where the bid-ask spread alone can swallow the arbitrage. There is also corporate action risk, such as a bonus, split or buyback, which can change lot sizes or adjust contracts mid-life. None of these make the strategy unworkable, but they explain why net returns are far thinner than the raw premium suggests, and why institutional desks with cheap funding and automated execution capture most of the available edge before retail traders can act.

• Carry cost higher than the premium, the classic mistake of ignoring your real financing rate.
• An ex-dividend date before expiry, which legitimately shrinks the basis.
• Slippage from legging in instead of executing both sides simultaneously.
• Rising physical-delivery margin demands in the final week before expiry.
• Thin liquidity in smaller stock futures where the spread itself eats the edge.
• Corporate actions that adjust contract terms or lot sizes mid-cycle.

Who Should and Should Not Run This Strategy

Cash and carry arbitrage suits a trader with genuinely cheap or idle capital, a clear grasp of cost of carry, and the discipline to execute both legs together and carry to expiry without flinching. It rewards patience and accurate cost accounting far more than market timing. If you are deploying your own cash that would otherwise sit in a savings account or liquid fund, and you can find a stock future whose premium annualises clearly above your opportunity cost plus all charges, the trade can produce small, steady, market-neutral returns.

It is a poor fit for anyone funding the position on expensive broker margin, for traders who chase the headline premium without doing the carry maths, or for beginners who confuse it with the cash-settled index trades they see discussed online. Be realistic about the edge. The Indian arbitrage space is heavily populated by proprietary desks and arbitrage mutual funds with sub-7-percent funding and automated systems, so most large, clean gaps are arbitraged away quickly. Treat this as a low-yield, low-risk parking strategy for idle capital, not a path to outsized profit, and you will judge it on the right terms.

Sources and Further Reading

For authoritative data and current contract specifications, refer to NSE India for lot sizes, settlement rules and physical-delivery circulars, the Reserve Bank of India for short-term interest-rate benchmarks that drive the cost of carry, and Zerodha Varsity for primers on futures pricing and taxation. Always confirm current rules, rates, lot sizes and contract specifications on the official source before you trade. Numbers in this guide 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.