A decline in savings avenues amidst a low interest rate regime has led to greater interest on the part of individuals in the stock market, according to a State Bank of India report.

The report, “Ecowrap”, put together by SBI’s economic research department (ERD), observed that with the key repo rate at 4 per cent, fixed deposit (FD) rates vary from 2.9 per cent to 5.4 for different tenures (SBI FD rate).

On a high: Retail players dominate capital market trading on NSE

The ERD emphasised that even the current small savings rates are low, varying from 7.6 per cent on Sukanya Samriddhi Yojana Account Scheme, 7.4 per cent on Senior Citizen Savings Scheme, 7.1 per cent on Public Provident Fund to 6.8 per cent on National Savings Certificate.

Another reason for the increasing retail participation in the stock market could be the significant increase in global liquidity, Ecowrap said. This is reflected in the FII (foreign institutional investor) inflows in FY21, with the total amounting to $36.18 billion.

Aspirational middle-class aid sharp increase in the number of demat accounts

Additionally, the Covid-19 pandemic, which has resulted in people spending more time in their homes, might be another reason for their tilt towards stock market trading.

Market rally

The ERD observed that over the past year there has been a significant increase in retail participation in Indian markets, aided by a huge market rally.

“The number of individual investors in the market has increased by a whopping 142 lakh in FY21, with 122.5 lakh new accounts at CDSL and 19.7 lakh in NSDL. Furthermore, another 44.7 lakh retail investors have been added during the two months of this fiscal,” the report said.

Referring to client-wise participation in capital market at NSE, the ERD said the share of retail investors has risen to 45 per cent in May 2021 from 39 per cent in March 2020, while that of DIIs (domestic institutional investors) and FIIs has declined to 7 per cent (from 10 per cent in March 2020) and 10 per cent (from 15 per cent in March 2020), respectively, during the same period.

However, the ownership pattern of Nifty-50 shows only a modest increase in retail share to 8.1 per cent in March 2021 from 7.8 per cent in March 2020, the report said.

Furthermore, the total retail participation (individuals holding demat account) as a percentage of total adult population is only around 7.3 per cent. Within retail, maximum allocation has been to financials, followed by consumer staples, energy and IT.

Economy-agnostic movement

Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, noted that markets have progressively improved, with BSE Sensex increasing from 28,265 at the beginning of April 2020 to above 52,000 now. This has led to increased investment in stocks and mutual funds in H2 FY21.

“...This would only imply an even economy-agnostic movement of stock markets...However, it is yet to be seen if this increasing retail participation is transitory or the beginning of long-term behavioural change,” he said.

Ghosh emphasised that there is also an issue of financial stability, which has arisen recently as the stock market has boomed (BSE Sensex increased from 28,265 at the beginning of April 2020 to above 52,000 now) with real economy suffering.

The ERD assessed that the share of savings in shares and debentures to total household (HH) financial savings in FY21 is likely to increase to 4.8 per cent-5.0 per cent of total HH financial saving (or 0.7 per cent of GDP from 0.4 per cent of GDP in FY20).This share was at 3.4 per cent in FY20.

If the share of savings in shares and debentures to total HH financial savings increases further to 1 per cent of GDP in FY22, then it means ₹2.2 lakh crore savings in debt and debentures is generated, the report said.

“If we look at the capital expenditure of the Government for FY22 of ₹11.4 lakh crore, it includes ₹5.5 lakh crore as budgetary support, ₹1.1 lakh crore as IEBR (internal and extra budgetary resources) of Railways and the rest ₹4.7 lakh crore as other IEBR.”

“Thus, even if half of the household financial savings in equity and debentures can be tapped and channelised into infrastructure spending, then it can cover around 24 per cent of the IEBR (other than Railways) of the Government,” opined Ghosh.

Related Topics