Indian traders shift from derivatives to broker-funded stock purchases

what happened

Retail and wealthy investors in India are gradually moving away from derivatives and toward buying shares with money lent by brokers, Moody's reports, citing Mint. Higher costs and tighter regulation make futures less appealing. The margin trading facility (MTF) book on the National Stock Exchange (NSE) rose 52% over the year to Rs 1.51 trillion at the end of September.

Meanwhile, average daily index futures turnover fell more than 30% year on year in September, and stock futures turnover dropped below Rs 1 trillion. Brokers including Angel One, Groww and HDFC Securities say clients prefer leveraged cash positions, which are simpler than futures and avoid mandatory expiry rollovers. Lending rates run at an annualized 9-12%, and up to 14% in some cases, against brokers' funding costs of 7-7.5%.

MTF lending is helping brokers offset weaker brokerage income during volatile periods.

why it matters

For brokers, rising MTF interest income partly makes up for lower commission revenue. For the market, a growing stock of leveraged positions raises the risk of forced selling through margin calls if prices correct.

market impact

Indian equities: a bigger leveraged book raises sensitivity to corrections; NSE and BSE brokers gain interest income

instruments