Increased Retail Participation In Derivatives Trading Can Cause Loss To Economy: Economic Survey

The Economic Survey 2023-24, released today, sheds light on the macroeconomic risk associated with the increasing trend of young retail investors participating in derivatives trading, particularly expiration-day trading. After Sebi, exchanges and Union Finance Minister Nirmala Sitharaman commented that derivatives trading has become a threat to household finances, the Department of Economic Affairs also seems to have the same view. Union Finance Ministry's Economic Affairs department even went on to the extent of saying that a substantial stock market correction could lead to significant losses for retail investors engaged in derivatives trading and they may feel "cheated", never to return to capital markets for a long time, which will be a loss to the economy.

Also read; Manipur Records Highest Retail Inflation, Delhi The Lowest: Economic Survey 2023-24

Economic Survey on Macroeconomic Risks of Derivatives Trading

While derivatives are intended as hedging instruments, they are mostly used as speculative instruments worldwide, with India being no exception, the survey report said. The survey highlights that derivatives trading holds the potential for significant gains, appealing to the gambling instincts of individuals and can augment income if profitable.

However, it warned that, globally, derivatives trading mostly results in financial losses for investors. "Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading," the report said.

Further, the survey underscores that a substantial stock market correction could lead to substantial losses for retail investors engaged in derivatives trading. This, in turn, may result in a scenario where Investors’ behavioural response would be to feel ‘cheated’ by unseen more considerable forces. "They may not return to capital markets for a long time. That is a loss to them and the economy," the report said.

Drawing attention to the risks developing economies face, it said, "The financialisation of economies has not ended well, even for advanced economies. The global financial crisis of 2008 is an obvious example. Developing countries face debilitating crises when financial market ‘innovations’ and growth run ahead of economic growth. The Asian crisis of 1997-98 set back the high-flying economies of the region for a long time. Therefore, India needs to have an orderly and gradual evolution of the financial market."

Further, it said, "All stakeholders – market participants, market infrastructure institutions, regulators, and the Government must ensure that capital markets play their theoretically assigned role of directing savings to their most productive investments. It is not just in the national interest. It is an act of self-interest, too."

Sebi Chairperson, Madhabi Puri Buch, had on July 19 expressed concerns about household financial savings being used for speculative bets rather than capital formation. A week earlier Securities and Exchange Board of India (Sebi) appointed an expert group on exchange-traded derivatives and proposed increasing lot sizes of futures and options from the current Rs 5 lakh to Rs 25 lakh, to curb retail participation in the F&O segment. Anecdotal reports about individuals borrowing money to trade options have raised concerns.