RBI Holds Firm on Guarantee Rules That Could Shake Stock Trading

A ₹1.2 trillion question is sitting in front of India’s central bank, and the answer will determine how smoothly millions of ordinary investors can buy and sell stocks every day.

That is roughly how much in bank guarantees proprietary trading firms have outstanding across Indian exchanges right now. Come July 1, new Reserve Bank of India rules could make those guarantees far more expensive to maintain, or impossible for some firms to keep at all.

Representatives of the Association of NSE Members of India met with central bank officials this week, asking the RBI to reconsider a circular it issued in February. The RBI listened. It offered no commitments.

What the February circular actually says

The RBI’s February 13 circular changed the terms under which banks can issue guarantees to exchanges on behalf of proprietary trading firms. Until now, these firms could get a bank guarantee by putting up a relatively small cash margin, supplemented by personal or corporate guarantees. The new rule says any such guarantee must be fully backed by cash, cash equivalents, or government securities, with at least half the collateral in actual cash.

That sounds like a technical banking rule. The practical consequence is immediate: proprietary traders would need to lock up significantly more capital as idle cash instead of deploying it in trades. For many firms, that means either raising fresh capital or shrinking their positions.

The RBI did not implement the circular right away. On March 30, it deferred enforcement by three months, pushing the deadline to July 1. That bought time for the brokers’ lobby to make their case.

Who are proprietary traders, and why do they matter?

Most people who follow markets focus on retail investors, mutual funds, or foreign institutional investors. Proprietary traders, often called “prop traders,” rarely come up in dinner-table conversations. But they are, in terms of sheer volume, among the largest participants in Indian markets.

In the financial year 2026, proprietary traders accounted for 59.26% of total equity derivatives turnover on the National Stock Exchange. That is more than half of all the futures and options activity on India’s largest exchange. On the cash segment, they represented 36.9% of turnover on the Bombay Stock Exchange’s Sensex-linked market and 30.9% on the NSE.

These are not rogue operators making directional bets on whether Infosys goes up or down. At least, that is what ANMI told the RBI. The association’s argument is that prop traders primarily function as market makers. They constantly post two-way quotes: a price at which they will buy, and a price at which they will sell. This continuous bid-ask activity means there is always a counterparty available when a retail investor wants to transact.

Remove that liquidity, and buying or selling stocks becomes slower and more expensive for everyone. Bid-ask spreads widen. Prices get choppier. The overall cost of participating in markets goes up, even if you have never heard of a proprietary trader in your life.

The RBI’s legitimate concern

The central bank did not write this circular without reason. Its inspection of certain private banks’ exposure to capital market intermediaries flagged a specific pattern: the same set of proprietary trading firms had applied for bank guarantees from multiple lenders simultaneously.

That creates systemic risk. If public money, channelled through bank deposits, backs aggressive trades in equity derivatives and those trades go wrong at scale, the exposure lands on the banking system. Given how dominant prop traders are in the derivatives segment, which is heavily concentrated in short-term weekly options, the concern is not theoretical.

The RBI’s position, as conveyed in the meeting, is that questions about what counts as “hedging” versus “speculation” are for the Securities and Exchange Board of India to decide. The central bank said it is focused on the banking system’s exposure, not on the taxonomy of trading strategies.

This creates a regulatory gap. ANMI argues that spread trades, which involve taking offsetting positions that largely cancel each other out, are by definition hedges and not speculative bets. The RBI’s response, in effect, was: take it to SEBI.

What happens to markets if the rules bite

The July 1 deadline is roughly seven weeks away. If the RBI does not move, the options before prop trading firms are narrow.

Some will raise fresh capital to meet the new cash collateral requirements. Others will reduce their derivatives positions to lower the size of guarantees they need. A third group may simply exit certain market segments where the capital cost no longer justifies the return.

The last scenario is the one market participants worry about most. A sudden reduction in prop trading activity in equity derivatives could widen spreads and increase volatility, particularly during periods of stress when liquidity already tends to thin out. The traders who reliably show up as buyers when everyone wants to sell, and as sellers when everyone wants to buy, are worth more than their market share percentages suggest.

For retail investors with equity mutual fund SIPs or direct stock portfolios, the impact would be indirect but real. Slightly worse execution prices, slightly wider gaps between buy and sell quotes, slightly higher costs when your fund manager rebalances the portfolio. Not a crisis, but a persistent friction that compounds over time.

What to watch now

If ANMI escalates its case to SEBI, requesting a formal clarification on what constitutes market-making versus speculation, the regulatory process could easily outlast the July 1 deadline. In that scenario, the RBI would likely need to grant another deferral.

There is also a larger signal worth reading here. The derivatives market in India, particularly in weekly options, expanded at a pace that regulators across the board watched with unease over the past two years. SEBI took steps to cool retail participation in weekly options contracts late last year. The RBI’s circular may be part of the same broader effort to reduce the financial system’s exposure to this segment, not just a narrow bank-lending rule.

For now, the ₹1.2 trillion in outstanding guarantees sits in a holding pattern. The brokers have made their case. The central bank has heard them. The decision, when it comes, will not just affect trading desks in Mumbai. It will ripple through every screen showing live market prices across the country, and eventually, into the returns earned by anyone with money in Indian equities.