'Gamification' of Indian equities poses macro and market threats

India's staggeringly large retail participation in high-risk derivatives trading calls for the use of risk-curbing disincentives

- ASHISH GUPTA

Indian equity market capitalization has more than doubled to $4.7 trillion in the past five years (as on 26 February 2024). Market depth has increased, with cash-market volumes now averaging $14.9 billion daily. Domestic investors have participated in this, with 80 million investors now directly accessing this market, some 40 million of them through equity mutual funds. Indian retail investors have participated in this wealth creation journey of half a decade, having gained an estimated ₹16 trillion in their investments in mutual funds and ₹20 trillion from direct equity investments. The combined value of their investments in mutual funds and equity is now placed at over ₹67 trillion.

Another equally remarkable transformation has been the emergence and now dominance of derivatives trading. The equity derivatives market in India is about 400 times bigger than the underlying cash market in terms of traded volumes, by far the largest multiple globally. In most markets, derivative volumes account for 5-15 times their cash-market volumes. Derivatives in India account for a staggering 99.8% of market volumes, trading a notional turnover of over $5.9 trillion per day.