A growing number of young Indian investors are swapping options for broker-funded margin trades, fueling record MTF growth and drawing fresh regulatory scrutiny.
Mumbai, July 20 – India’s efforts to curb derivatives trading on stocks have prompted a portion of the country’s retail investors to shift to leveraged bets on stocks, fueling a rise in margin loans and drawing regulators’ attention to the pace of market growth.
The world’s most populous country has over 130 million retail traders in the stock market, with an average age of about 32. Their appetite for riskier bets is fueling a boom in options trading, raising concerns about financial stability and the prospect of tighter regulatory crackdowns.
However, signs of migration of speculative activity are emerging: younger traders are increasingly using brokerage financing instead of more expensive option-based strategies. Ishan Tana, a 26-year-old banker from Mumbai, is one such trader.
Tana previously traded options, but now borrows from brokers to boost profitability from swing trades through the Margin Trading Facility (MTF), which allows borrowing against the shares purchased to buy a larger number of blue-chip securities.
Leverage through the MTF reached a record around $15 billion nationwide, up 50% from the prior year. While this is only part of India’s cash equity market, estimated at roughly $602.9 billion, MTF volume equaled about daily trading, according to the exchanges.
The MTF segment typically attracts aggressive retail traders.
– Devarsh Vakil
The size of the credit exposure extended by his firm has risen substantially over the last 15 months, more than doubling; Vakil notes that traders previously active in certain equity futures are increasingly moving to the MTF after the derivatives rules were tightened.
Tana aims to take advantage of short- and medium-term moves, increasing profits through leverage: he selects stocks from the Nifty 500 index and holds a mid-size position of about 500,000 rupees.
Indian brokers charge 9% to 18% for financing their stock investments, with market leaders planning to cut rates to attract more clients, according to a market source.
Leverage – Caution
The consequences of the changing retail market landscape are being felt across global financial markets as well. The high level of leverage among retail investors is causing concern in South Korea, where regulators are working to cool speculative demand.
The similarity between India’s MTF boom and the situation in South Korea lies in fintech-based debt democratization and the fear of “missing out” that haunts retail investors in both markets.
– Manishi Raychaudhuri
The shift in India comes as the market regulator SEBI prioritizes developing the cash stock market, while encouraging traders to avoid excessive dependence on derivatives.
SEBI is considering expanding financing options for leveraged cash trades and allowing a greater number of instruments as collateral, according to internal documents reviewed by Reuters.
At the same time, the regulator says to be cautious about overusing leverage. In May it rejected requests from broker associations to ease collateral requirements, according to internal documents.
“Initial margins that brokers charge clients reduce excessive leverage and help prevent the buildup of systemic risk,” the SEBI document notes.
SEBI did not respond to Reuters’ request about expanding the segment and possible new risks.
Despite this, options maintain a significantly higher level of leverage – they allow large positions to be built with minimal starting capital.
Margin trading remains far smaller in volume than derivatives, but is expected to be one of the fastest-growing segments.
The risks are evident – while margin trading boosts profitability, it also increases losses.
– Manishi Raychaudhuri
Especially during rising market volatility, margin trading further increases its volatility.
– Manishi Raychaudhuri
Boom in the Business
Ashish Nanda, Head of Digital Business at Kotak Securities, the second-largest broker in this segment, said he expects MTF to grow 20–25% on an annualized basis, while the derivatives segment around 10%.
Indian retail traders using MTF are clustered around India’s IT services sector, which has suffered significant losses this year.
Tata Consultancy Services and Infosys, both down more than 30% this year, are among the most actively bought shares via MTF, along with banking giant HDFC Bank; all three were among the most sold by foreign investors.
Such counter bets may become one of the first tests of whether rising margin trades amplify volatility in Indian markets and whether retail investors can withstand the risks associated with using borrowed funds.
Siddhartha Gadhwal, a 29-year-old founder of an Indian startup, plans to use MTF for a substantial bet on India’s IT stocks.
The sector has crashed, but it will recover.
– Siddhartha Gadhwal
(1 USD = 96.3650 Indian rupees)
Materials prepared by Jaishri P. Upadhyay and Jaspreet Kalra in Mumbai.
The economic analysis of this trend points to the need for careful monitoring of regulatory policy and market dynamics, as increasing use of leverage could impact volatility and market stability in the long run.