New Delhi: Sunil Kapadia would regularly borrow from banks to invest in India’s stock markets, seeing them as a one-way ticket up the middle-class ladder as the economy hummed along at near double-digit growth rates.

But his dream of easy riches lay wrecked as the country’s main stock index, the Sensex, tumbled to three-year lows last month, taking its losses in 2008 to more than 50%, forcing him to move his family to a cramped suburban apartment.

Safer avenues: After the stock market crash, small investors now favour fixed deposits in banks, interest on which has risen to at least 10%. Rajanish Kakade / AP

Thousands of small investors were lured into booming stock and commodity markets as the economy soared along at growth rates of 9% or above in the past three fiscal years and the government spoke of lifting the increases into double digits. Now, with the vicious collapse of the market, their savings are lost and they are unable and unwilling to invest again. The crash has also hit commodities, with prices of goods from edible oils to metals dropping by 40-50% over the past four-five months.

It is a hard blow to the confidence of India’s aspiring middle classes, and their curtailed spending has also unsettled foreign firms and investors, who were queuing up to do business in the $1 trillion (about Rs50 trillion) economy.

“At the moment, investors are scared of their own shadows, and it will take some time for them to be back," said Vikram Bhatt, head of brokerage firm Ajmera Associates Ltd in Mumbai.

Most small investors were attracted by a seemingly unstoppable bull run in the stock market. The main 30-share index of the Bombay Stock Exchange rose by six times in the five years till the end of 2007, bolstered by foreign funds.

Foreign institutional investors (FIIs), having bought a record net $17.4 billion of stocks in 2007 as the market rose 47%, have sold more than $13.5 billion of stocks this year.

Brash traders became a symbol of India’s modernizing economy, and stocks were so popular among retail investors that some could eke out a meagre living on the sidewalks by selling IPO (initial public offering) and mutual fund applications for a few rupees.

But small investors have largely disappeared as the market imploded. From a record high of 21,200 points in January, the Sensex crashed to under 7,700 last month.

Although statistics show only 2.5% of India’s 1.1 billion population invests in stocks, experts say the number of investors was growing steadily when the market nosedived.

Risk-averse investors now favour the safety of fixed deposits. Bank deposit rates have risen to at least 10% in the last two-three months.

“The market will continue to downslide as most of the money was flowing in from FIIs and the insurance sector all this while," Vinod Kumar Sharma, head of research at Anagram Capital Ltd said.

As a result of the market crash, many traders and investors in the once booming sector, who had booked luxury cars and plush apartments with bank loans, are now struggling to meet the expense of their children’s education, or monthly grocery bills. “I used to drive a Toyota Innova car, but nowadays I prefer to take a three-wheeler scooter to work," said copper and brass trader Dharmesh Dave.

Some experts say the stock markets may rise after a year or so, if global markets stabilize, but only 20-30% over the Sensex’s current level of around 9,000 points.

“It is not likely to climb to the record level of 20,000-21,000 points reached in January, as the impact of the global financial turmoil is expected to linger even after a year until the FIIs return," said Chandra Mohan Mukherjee, director of Ace Financial Services in Kolkata.