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Retail investors have been less active in directly buying shares on the National Stock Exchange’s secondary market in the first half of the current fiscal year (FY23) as aggressive monetary tightening by the US Fed to tame decadal high inflation drove foreign investors to pull out 587.71 billion from Indian equities, raising market volatility.

Direct net buying by retail investors -- individual domestic investors, NRIs, sole proprietorship firms and Hindu Undivided Families (HUFs) – consequently fell to 528 billion in the first half of FY23, down 12.4% from 603 billion in the corresponding period of FY22, according to NSE’s Economic Policy & Research data.

Loose monetary policy by global central banks since the pandemic resulted in easy money flowing into risky assets across developed and emerging markets. In India, apart from participating through mutual funds, retail clients pumped in huge quantities through their brokers onto the NSE’s secondary market, where participants buy and sell shares daily.

Retail direct buying resulted in flows from this category, hitting a record high of 1.64 trillion in FY22, nearly two and a half times the net inflows during FY21.

However, choked supplies following the Ukraine war in February this year raised retail prices from energy and food to power tariffs to decadal highs, forcing the US Fed to raise rates from near zero to 3-3.25% between May and September, the fastest pace since 1994.

FIIs who borrowed at dirt cheap rates in the US to invest in riskier emerging market assets started dumping them, which raised the market volatility and caused indices like the Nifty to hit a 52-week low of 15183 on June 17. Though the market recovered to a high of 18096 in mid-September, the ride was not smooth with the Nifty falling again to 16747 by the end of last month.

“After a secular bull run from a low of 7511 in March 2020 to 18604.45 in October 2021, the markets have been wobbly and this has somewhat impacted direct retail participation, though retail buying through the SIP route remains intact," said Sudip Bandyopadhyay, chairman, Inditrade Capital.

Along with slightly lower net purchases, the number of retail investors participating in the secondary market declined to 9.7 million in September from a peak of 11.7 million in January this year. The result was a 6.5 percentage point fall in the cash market share of retail clients to 37.5% in April -August 22 from 44% in the corresponding period of the previous fiscal year, the NSE data shows.

Part of this was made up by DIIs – banks, mutual funds, insurance companies – who saw their cash market share rise by almost 3 percentage points to 10.9%.

The rise in volatility in the first half of FY23 is clearly visible in the fear gauge India VIX average levels which stood at 19.87 against 16.25 in the first half of FY22.

Besides the increased choppiness, certain market participants attribute the drop in retail investor market share to the upfront margin requirement of 20% for cash market transactions.

“Along with poor market performance in H1, retail average daily turnover was impacted after exchanges scaled up the upfront margin requirement for cash market transactions in stages to 20% last September," said Prakarsh Gagdani, CEO, 5paisa Capital. “This removed the extra leverage that brokers used to provide (to clients)."

The upfront margin requirement mandated by market regulator Sebi involves brokers collecting 20% upfront from clients desirous of buying or selling shares on the cash market to reduce systemic risk arising from client default.

 

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