Surging F&O Tide A Macro Risk For India’s Buoyant Financial Markets

Data is sketchy on the household savings, with the last data set available for March 2023. The RBI’s household savings break up the financial asset flow into instruments such as equity and mutual funds. It does not have any perspective on flows to speculative investments. Therefore, it maybe time for the Indian central bank, RBI, to start capturing that data so that it helps in formulating policy decisions.

What is worrying the regulators are two key aspects — the diversion of avings away from banks as well as as capital formation instruments and the subsequent rising flows into speculative trading.

A comparison of household savings between FY21 to FY23 reveals that share of flow to three asset classes in the household savings i.e., insurance funds, provident and pension funds and investments has risen from 39% of financial assets in FY21 to 47.7% of financial assets in FY23.

This comes at a time when the net financial assets have fallen from 11.5% of GDP in FY21 to 5.1% of GDP in FY23. This figure is likely to have further declined in FY24. The RBI is yet to release data for the last financial year.

The pilferage of the incremental household savings has also led to trading value and volumes in derivative markets to rise multi-fold in the last five years.

According to the NSE’s June edition of Market Pulse, the average daily open interest in the equity futures in May stood at Rs 4.14 lakh crore and Rs 13.67 lakh crore for equity options on a notional basis. Even assuming the premium open interest at 10% of the notional open interest value the total average daily open interest or money deployed in the derivatives market is around Rs 5. 5 lakh crore.

Now, that’s part of the unaccounted household saving being deployed in the speculative activity which is not helping in capital formation either through equity or through lending institutions.

In FY24, NSE added 1.87 crore new investors and thus this total investor base of NSE stood at 9.5 crore at the end of May 2024. A bulk of these new investors plunge themselves into the derivatives market thereby using their savings for speculative trade. Gujarat, Maharashtra, Madhya Pradesh, Rajasthan, Bihar, and Tamil Nadu are among the top states adding new investors at a faster pace.

Th rise of equity trade has also become a cause of concern given how the markets have risen relentlessly in the last few years. The Average daily turnover of the equity cash market has risen from Rs 32,052 crore in FY19 to Rs 1.09 lakh crore in the FY25-to date with delivery based average turnover being under Rs 20,000 crore.

While the average daily turnover in the equity derivatives (futures and premium turnover in options) markets has risen from Rs 91,000 crore in FY19 to Rs 1.57 lakh crore, that’s Rs 2.3 lakh crore of daily float that has moved away from banking channels to speculative trade.

So, what is pushing the new investors to equity options? The answer lies in the average trade size. While the average trade size for equity futures stood at Rs 9.86 lakh, it was abysmally low at Rs 6,194 in the equity options segment. The small ticket size is luring retail investors to punt in the segment. The losses if any may be small, but it is a known fact that nine out of every ten investors lose money in derivative trade, the rising number of new investors into the derivatives market has forced the regulators and the government to look at the urgent counter measures.

The move of savings away from traditional instruments has now caused a structural shift in the liquidity of the financial system. And that's why regulators are concerned!