The Economic Survey 2023-24 has raised concerns about the consequences of the increased participation of retail investors in derivatives trading, and the financial market growth running ahead of the economic growth. The survey, tabled in Parliament on Monday, said the capital markets are becoming prominent in India’s growth story.
The 476-page document has hinted at potential regulatory and government policy interventions as the financial sector undergoes critical transformation.
“The Indian financial sector is at a turnpike moment. The dominance of banking support to credit is being reduced, and the role of capital markets is rising… As India’s financial sector undergoes this critical transformation, it must also brace for likely vulnerabilities and prepare itself with regulatory and government policy levers to intervene and hedge, as required,” the Economic Survey said.
It said India needs to have “an orderly and gradual evolution” of the financial market, saying that developing countries face “debilitating crises” when financial market innovations and growth run ahead of the economic growth.
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Shankar Sharma, founder of GQuant Investech, agrees. “Having very high equity ownership as a percentage of financial assets is a recipe for disaster sooner or later. For a country with the $2,500 per capita gross domestic product (PCGDP), the risk cushion is simply not there to afford high degrees of volatility in asset values,” Sharma said in a post on X.
Deepak Shenoy, founder and CEO of Capitalmind, however, shared a different view. He said the Economic Survey citing the global financial crisis of 2008 as an example of the consequence of financialisation of the economy was a very bad take. “They have ended up far better than us, despite all the challenges of 2008. They have people with more secure futures, they have richer people, they have better facilities and funding… It is callous to say it has not ended well,” Shenoy said.
Stressing the need for “careful consideration” on the significant increase in retail investors in the stock market, the survey said it is crucial because of the possibility of overconfidence of retail investors leading to speculation and expectations of greater returns, which might not align with the real market conditions.
It especially raised concerns over the spike in retail investors’ participation in the futures and options (F&O) segment. It said globally derivatives trading loses money for investors for the most part, and therefore, there is a need to raise investor awareness about this.
The survey said a significant stock correction could mean considerable losses for retail investors participating in F&O. Such a scenario may make the investor “feel cheated” by unseen, more considerable forces. The document said this may propel them to not return to capital markets for a long time. “That is a loss to them and the economy.”
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UR Bhat, co-founder of Alphaniti Fintech, said, “It’s a fact that F&O volumes in India are the highest in the world, but retail investors are losing money in these trades. Therefore, there is a need to either educate investors or make it more difficult for them to trade in F&O.”
Bhat anticipates this will be a precursor to Sebi increasing lot sizes or margins in F&O to ensure participation only from serious players.
The survey also said the rise in retail participation in stock markets was more substantial and steadier through the indirect channel via mutual funds. It has highlighted that FY24 was a “spectacular” year for the mutual fund industry as their assets under management rose 35% to Rs 53.4 trillion and the number of folios increased from 146 million to 178 million.
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