Indian Stock Market Watch
Some investors borrow funds to buy equities. This is called buying on margin, where the investor puts some of his own funds (typically 50%) and borrows an amount (generally an amount equal to his own funds) from the broker to invest in equities. Margin enables the investor – either short term or long term – to increase his or her exposure to the market. A commonly used term for this is leverage. Margin funding is generally considered a barometer of the bullishness of investors on the market.
Some investors borrow funds to buy equities. This is called buying on margin, where the investor puts some of his own funds (typically 50%) and borrows an amount (generally an amount equal to his own funds) from the broker to invest in equities. Margin enables the investor – either short term or long term – to increase his or her exposure to the market. A commonly used term for this is leverage. Margin funding is generally considered a barometer of the bullishness of investors on the market.
I have been looking at the data on margin funding of
investors by brokers on the National Stock Exchange (NSE), the predominant
stock exchange in India. . Bombay Stock Exchange data is also available, but I
have chosen to ignore it since currently margin funding by its members is just
1-2% of funding by NSE members.
The graph below gives the picture since 2005. On the same
graph I have juxtaposed the performance of the Niftyfifty,a closely followed
index of the Indian stock market.
The level of margin funding – total outstanding at the end
of a month - extended by its members on the NSE has risen to 69 crores as at
end of June 2015 from Rs 54 crores a year ago. But this is nowhere close to the
last two peaks – Rs. 270 crores at the end of January 2008, and later Rs 318
crores in 2010 at the end of September 2010. Both these peaks coincided roughly
with bull runs in the market as can be seen from Niftyfifty graph. Yet, in the
recent bull run that accelerated after the Modi government came to power funding
for margin trading has hardly recovered!
The graph below shows both margin funding and total turnover
of the cash market on the NSE. From 2013, the market’s turnover has increased
and has now averaged in excess of Rs 20,000 crores during the last one year –
similar to the peaks seen in the last two bull runs ending in 2008 and 2010.
The ratio of margin funding as percentage of market turnover has therefore
fallen to just 0.4% as of the end of June this year compared to previous highs of
just over 2% during the bull runs that ended in 2008 and 2010.
Does this tell us something about the future of the current bull run? If we assume that investors who trade on margin are different from the average investor – either they could be more savvy and/or obviously greater risk takers - then it appears this time round they have much less enthusiasm for the current bull run which started in 2012, and picked up pace after the Modi government came to power. They could be right or just dead wrong. Either way, I propose to keep a watch on the trends in margin trading.
Does this tell us something about the future of the current bull run? If we assume that investors who trade on margin are different from the average investor – either they could be more savvy and/or obviously greater risk takers - then it appears this time round they have much less enthusiasm for the current bull run which started in 2012, and picked up pace after the Modi government came to power. They could be right or just dead wrong. Either way, I propose to keep a watch on the trends in margin trading.
Alternatively, could it be that the investors who trade on
margin are now borrowing not just from stock brokers but also from banks and
NBFCs? I don’t have the answer to that because my research indicates that such
disaggregated data is not available.
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