One is that Indian household savings have been declining. The gross domestic savings rate for households has fallen from 22.7% of GDP in FY2021 to 18.4% in FY23, as per the National Account Statistics 2024 data released by the Ministry of Statistics and Programme Implementation (MoSPI).
In absolute terms, household savings reduced from ₹23.29 lakh crore in FY21 to ₹14.16 lakh crore in FY23.
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Second, the participation of Indian retail investors in the Indian stock markets has skyrocketed, with mutual fund investments, stock trading accounts and retail participation in the derivatives markets all hitting record levels.
One fallout of this trend has been that Indian banks are seeing slower growth in deposits than in their lending books.
The worrisome trend is that, according to an SEBI study, more than 90% of retail traders venturing into the futures and options markets are making losses.
So, we have falling household savings, increasing retail participation in the stock markets, increasing retail share in derivatives trading, and shifting away from bank deposits to the stock markets, leading to a structural asset-liability mismatch for banks.
This has led to statements by both the governor of the Reserve Bank of India (RBI) and the Chairperson at the Securities and Exchange Board of India (SEBI) highlighting the risks from these trends to the financial system and the health of household finances.
Both the RBI and SEBI are talking of active interventions to check the impact of these trends on both the system and the individuals concerned.
We won’t know until many years later if a judicious mix of light regulations and free market forces was correct at this juncture or if heavy intervention with blunt policy instruments was the need of the hour.
Personally, I am a votary of the enlightened self-interest principle being allowed to run the course in a broad, principles-based regulatory regime. It should not be a Wild West excess, as happened in the 2008 global financial crisis, but it should also not be so prescriptive and restrictive that it kills off the economy’s growth impulses.
Retail participation in the stock markets via well-regulated, well-managed, and well-diversified mutual funds is a welcome development.
Over the last two years, this increasing retail ownership of Indian equities has meant that the impact cost from foreign portfolio investors’ shifting allocations has lessened. In December 2023, Indian households owned more of the Indian markets than the consolidated ownership of FPIs in India. That is a massive achievement.
This comes with increasing household savings going into investments and active speculation. The question regulators need to ask is at which point they need to intervene and with what measures.
The RBI has expressed concerns about structural imbalances. The issue remains that banks are sitting on fat cost-income ratios and net interest margins, enjoying 3-4% spreads.
The RBI has suspended product rollouts at banks from time to time due to IT systems or governance deficiencies. Banks must work harder to deepen the liability base and create value for customers to hold money with them.
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If an arbitrage fund can offer a 7% return, two-day liquidity, and relatively satisfactory risk perception, banks must consider their deposit pricing.
It is another matter that arbitrage funds also enjoy superior post-tax returns due to being treated as equity funds. Banks have asked for tax sops for depositors.
However, banks’ sales teams do not welcome depositors as much as the commission-paying buyers of insurance, mutual funds, and AIFs (alternate investment funds).
Deposits need to match returns, convenience, and overall value addition versus these products to grow, not by regulatory patronage.
SEBI’s concerns are well-founded. India used to be a nation of savers and the quest is to make it a nation of investors. En route to that, we should not become a nation of speculators.
The SEBI concerns are valid, but there are many dimensions. Who made the most money in India from March 2020 to July 2024? Retail investors opted for systematic investment plans, the ones who kept investing through the downs and lows of the COVID-19 pandemic and global rate hikes.
Not the ultra-high net worth individuals who sold in March 2020 and then kept waiting for an entry point that never came. Not the foreign portfolio investors who bolt first and think later.
Even SEBI’s own data shows that on June 3 and 4 (the day of the election results in India), Indian retail investors put in ₹3000 crore each day in the markets.
The FPIs invested ₹3000 crore on June 3 and sold ₹22,000 crore on June 4. Which was the smart money? Can anyone assume superior knowledge to this cohort of dedicated regular retail investors?
Secondly, we are still at a take-off stage. Only a small portion of household savings are going into the stock market. A market correction will cure the excesses.
Do we really need to “regulate” behaviour to teach investment principles to this cohort?
On the one hand, SEBI is allowing hedge fund products at Rs 10 lakh and inverse, leveraged exchange-traded funds, and on the other hand, it wants to curb do-it-yourself investors.
The regulators’ mandate is market stability and integrity and, yes, investor protection from Ponzi schemes. But their mandate is not investor returns protection.
Otherwise, you will always have infantile investors who take credit for the return during a bull market and blame the regulators for losses in corrections.
A caveat emptor is in order. The regulator must protect the market guardrails, but an enlightened self-interest should be allowed to operate within those limits.
In view of the Jane Street disclosures, there is a need for regulation of high-frequency trades and quantitative strategies.
China has the algorithms of every high-frequency trader. Only 1,600 are allowed to operate in China, and they have strict regulations. Recently, they also curbed short selling.
In contrast, we have a very well-regulated, free market. Retail participation is good for deepening the market, but we need to curb the HFTs and Quants, who are microsecond investors and magnify market volatility.
Protect the market integrity, make systems strong, create a level playing field for the over-taxed retail investors vis a vis the untaxed FPIs protected by double tax avoidance agreements, and then leave the Ms/Mr/Master/Mrs Average India alone to prosper.
Don’t assume you know better than those of us in non-institutional India who have a down-to-earth, humble worldview, immense resilience, and infinite optimism.