India’s rapid increase in retail investors in the stock market is raising significant alarms among both government officials and financial regulators, amid fears that household savings are being diverted into risky speculative trades. A recent study by the Securities and Exchange Board of India (SEBI) has highlighted troubling trends: seven out of ten intraday trades in the cash equity market resulted in losses for the year ending March 2023. This study echoes findings from the previous year, which showed that nine out of ten active retail traders lost money in derivatives trading.
In response to these concerns, the SEBI has consistently advised small investors to resist the lure of quick profits from trading. On Tuesday, Finance Minister Nirmala Sitharaman took action by increasing tax rates on equity derivatives and capital gains from stock investments. This move aims to temper the retail trading fervor that has propelled India’s $5 trillion stock market to unprecedented highs.
“The futures and options segment is crucial for price discovery, but the government is cautious about fostering speculative trading among retail investors,” Sanjay Malhotra, India’s revenue secretary, stated in an interview on Thursday.
India’s primary stock index has more than tripled from its lows during the Covid-19 pandemic in 2020, largely driven by a surge in retail investors engaging in high-risk futures and options trading. This surge has made India the global leader in equity derivatives trading volumes.
Abhishek Banerjee, founder and CEO of Lotusdew Wealth and Investment Advisors Pvt., voiced concerns about the broader economic implications. “The worry is that individuals could lose their savings, which may impact their consumption habits and hinder long-term capital formation. It’s a macroeconomic issue, not just a problem of leverage,” he said.
