Market Mayabazaar

Between mid-April and mid-May, Indian stock markets lost 2000 points. Markets are highly volatile. A general plain vanilla explanation cannot separate the sizzle from the substance. There is an increasing trend towards speculation in the markets that have a natural instinct for sentiment.

Greater reliance on foreign investment, introduction of risky instruments, low participation of small and retail investors, insider trading etc., are among a host of factors that make markets highly volatile and unpredictable. For instance, estimates suggest that the total volume of derivatives segment is ten times that of cash segment. In a country of 125 crore people, there are about 40 to 50 lakh active retail investors only.

Experts state that the active retail investor base has not expanded in the last few years. But, there are 2.33 crore demat accounts in the country. This indicates the low level of active participation among the retail investors due to fear of risk involved in the volatile stock market. A stable and growing stock market would attract more and more retail investors, which in turn make the markets more stable.

The empirical data even proves that the depth of Indian capital market is shallow. For instance, Mumbai accounts for nearly 60 per cent of cash segment by volume on the stock exchanges. The top five cities together account for almost 80 per cent of the volumes. This makes the market investment largely a metropolitan phenomenon, though the trading has penetrated to smaller centers.

Despite being the best performing markets in the world in 2014, Indian stock markets still fail to attract the small retail investors. As the retail investors are scared away from the markets, the Indian capital market is increasingly dependent on foreign institutional investors (FII). In the last three financial years, FIIs have pumped in Rs 3.31 lakh crore, accounting for 40 per cent of the total foreign investments India has received since 1993.

Data clearly reveals how FIIs act as bulls and bears of the Indian stock market. The butterfly capital with its highly footloose character is subjecting the Indian markets to predatory pressures. Mutual funds are suggested as a less risky alternative available for the small investors who still want to participate in the markets.

But, the Indian experience suggests that even mutual funds also fail to attract small investors in any significant manner. A major chunk of the equity assets with mutual funds comes from corporates and high net worth Indians (HNIs). The total equity assets under management with mutual funds is a little over Rs 3 lakh crore, which is less than the market capitalisation of one company like TCS.

Estimates suggest that 54 per cent of Americans have direct exposure to stock markets while it is a meager one to two per cent in India. Even in China, there were 18 crore trading accounts at the end of 2014, giving the Chinese markets a bullish character. The situation in India is insignificant. Achieving stability, growth and depth should be the immediate objective of the capital markets in India.