Retail investors are driving current stock market rally in India

Retail investors are driving current stock market rally in India
Retail investors are flocking to the stock markets due to lack of too many other investment options in view of falling interest rates on fixed return instruments like fixed deposits.Courtesy: ANI

Individual investors now account for almost half of share turnover on exchanges. Booming prices, falling interest rates and rising internet penetration are responsible for this trend. However, the jury is out on whether this signals a structural shift in the composition of the investor profile on Indian bourses.

There’s a retail boom underway on the Indian stock exchanges. Driven by a combination of falling interest rates, better and higher internet penetration and the stock market boom, millions of individual investors are pouring billions of dollars into stocks.

A State Bank of India (SBI) report says retail participation is rising and points out as many as 4.5 million retail investors opened demat trading accounts in the first two months (April-May) of the current financial year.

The National Stock Exchange (NSE), India’s largest stock exchange, added 9 million retail investors during the 2020-21 fiscal.
The National Stock Exchange (NSE), India’s largest stock exchange, added 9 million retail investors during the 2020-21 fiscal.Courtesy: Getty Images

Millions of fresh investors entered market

Then, the website of Angel Broking, a leading Indian brokerage, quotes data from the National Stock Exchange (NSE), India’s largest stock exchange, to say it added 9 million retail investors during the 2020-21 fiscal. Further, Bombay Stock Exchange (BSE) data shows it added 17.8 million new investors from May 2020 till early May this year.

There could be some overlap between the NSE and BSE figures as individual Indians opened 14.2 million demat accounts between April 1, 2020, and March 31, 2021, data from depositories NSDL and CSDL showed.

Driven by a combination of falling interest rates, better and higher internet penetration and the stock market boom, millions of individual investors are pouring billions of dollars into stocks.

Non-institutional investors account for 50 per cent of market activity

A Reuters report quoted Vikram Limaye, managing Director & Chief Executive Officer of NSL as saying non-institutional investors now account for around 50 per cent of market activity and that the country added 15 million new investors over the past 12 months.

Between April 1, 2020, and August 4, 2021, the benchmark BSE Sensex has rallied 92.4 per cent from 28,265 to 54,369, demonstrating that people are earning good money from stock trading.
Between April 1, 2020, and August 4, 2021, the benchmark BSE Sensex has rallied 92.4 per cent from 28,265 to 54,369, demonstrating that people are earning good money from stock trading.Courtesy: ANI

Combination of factors behind new trend

Experts said the main “pull factor” is the bull run in the stock markets. Between April 1, 2020, and August 4, 2021, the benchmark BSE Sensex has rallied 92.4 per cent from 28,265 to 54,369. The demonstration effect of other people earning good money from stock trading has probably been the biggest contributory factor for this trend.

Other reasons why retail investors are flocking to the stock markets include the lack of too many other investment options in view of falling interest rates on fixed return instruments like fixed deposits.

In India, where households have traditionally parked their savings in fixed deposits, the record low repo rate – the benchmark for lending and deposit rates at commercial banks – of 4 per cent set by the Reserve Bank of India (RBI) has meant that deposit rates at banks now vary from 2.9 per cent to 5.5 per cent.

Even various government-backed small savings schemes and the public provident fund give 6.8-7.6 per cent returns. This makes the potential upside offered by stocks very attractive to many middle class and high net worth households.

Other reasons why retail investors are flocking to the stock markets include the lack of too many other investment options in view of falling interest rates on fixed return instruments like fixed deposits.

WFH encouraged more people to enter stock trading

Then, more people spending more time at home have opened up opportunities for them to utilise their spare time to dabble in stocks. The increasing penetration of the internet and of smart devices has also brought online stock trading within the reach of many more people.

Many brokerages have also been very aggressive in selling their online trading services with free tutorials thrown in for first time traders.

According to data from the stock exchanges, retail investors now account for almost half of their turnover. In 2020-21, for example, this group of investors was responsible for 45 per cent of the turnover on NSE – its highest level in a decade.

Then, the Angel Broking website says: “One more significant statistic to note is that the average daily turnover of internet-based trading went up 70 per cent year-on-year in the cash market to touch Rs 15,400 crore (more than $2 billion) in the financial year 2021. This signifies that increasing online penetration and use of smart devices and the Internet during the pandemic has led to greater awareness and participation by retail investors.”

Small investors always the last to enter the market

Some investors, however, advise caution. A senior executive at a leading mutual fund said on condition of anonymity (because he is not authorised to speak to the media): “If you look at all the previous boom-bust cycles in India, retail investors were always the last to enter the market – when share prices had already risen quite high. And they were always the ones that suffered the biggest losses when the prices corrected.”

He is quick to add that he is not predicting doom for retail investors; only pointing out historical precedents.

Experts are not certain if this retail boom signals a structural shift in the Indian stock market with small investors as a group emerging as a major factor. “That will depend on whether this trend outlasts the current boom,” said the MF executive quoted above.

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