Despite systematic investment plans (SIPs) receiving more than 13,000 crore for the sixth straight month in February, cash market turnover decreased by 20% in FY23. While this was happening, the notional value of derivatives more than doubled as a result of regulatory limits and prolonged volatility, which likely resulted in lower delivery volumes.
In FY23 (until March 22), the cash market’s average daily turnover was 53,564 crore, a decrease of nearly a fifth from 66,799 crore in FY22.
The average daily turnover of derivatives more than doubled to 152 trillion nominally over the same time period from 68.3 trillion.
Even after taking into account the premium turnover of options, the total turnover of derivatives increased by 10% to $1.61 trillion in FY23 from $1.46 trillion in the prior fiscal year.
“A flat to lower market has caused cash volumes to correct, while derivatives volumes have risen due to intraday traders shifting to the F&O (futures and options) segment from the cash market where broker leverage has also been capped,” said Nithin Kamath, founder and CEO of Zerodha, India’s largest stockbroker.
The Nifty has decreased 2.22% so far this year to 17,076.9 as of Thursday, compared to a growth of 19% in FY22. According to a Sebi regulation that became fully effective in the second half of 2021, clients who trade in the cash market were required to put up a 20% upfront margin that was previously financed by brokers. By safeguarding the market from broker default in the event that clients were unable to make payments in the event that their trades went wrong, the move attempted to lower systemic risk.
“There are many reasons for the cash market volumes falling sharply,” said Kamlesh V. Shah, president of the Association of National Exchanges Members of India (ANMI), a pan-India brokers’ body. “The upfront margin is one of the main reasons for intra-day trading in cash moving to the derivatives segment, where volumes have risen. To be sure, Sebi’s rule on upfront margin is a good move to protect market integrity,” Shah said. Shah also said trading in Nifty weekly options was a cheaper and more effective way of managing risk.
The futures and options segment is used by foreign portfolio investors, domestic institutional investors and some high-net-worth individuals (HNIs) to hedge their cash market portfolios. Their risk is transferred to proprietary traders and other HNIs who take contra positions based on informed decisions, said S.K. Joshi, executive director at Khambatta Securities.
Inflows into mutual funds through the SIP route have been averaging above ₹13,000 crore each month since October 2022. However, the share of individual investors in total NSE turnover fell 434 basis points (one basis point is one-hundredth of a percentage point) to 37% in April-January FY23 from a year ago.