The deserted Bombay Stock Exchange building is pictured as the Sensex went down after a lockdown in the wake of the start of the novel coronavirus pandemic, in Mumbai on March 23, 2020. Photo: The Times Of India

India’s Covid-19 lockdowns have affected the economy and household incomes, but retail participation in stock markets is witnessing a surge.

According to a State Bank of India study, 4.47 million retails investor accounts have been added during the two months of this fiscal year. For the last fiscal year, 14.2 million new individual investors were added to the market. According to National Stock Exchange data, the share of individual investors in total turnover on the stock exchange has risen to 45% from 39% in March last year.

The state-owned lender observed that it is yet to be seen if this increasing retail participation is a transitory phase or the beginning of long term behavioral change. If this becomes the norm, it could also enable a larger resource pool for financing India’s infrastructural requirements.

“Greater retail participation has also led to increased investment in stocks and mutual funds in the second half of 2020-21 and this higher retail participation in stock markets may become more of a self-fulfilling prophecy,” it added.

The markets in India have also progressively improved, with the Bombay Stock Exchange index Sensex going up from 28,265 points at the beginning of April last year to above 52,000 now. “This has led to increased investment in stocks and mutual funds in H2 FY21,” the report said.

The State Bank of India report noted that this time there is renewed interest in healthcare stocks. In addition, financial stocks and energy and information-technology companies are also attracting investor interest.

As for the reasons behind this surge, the lender said the savings avenues amid the low-interest rate regime have led to greater interest by individuals in the stock market. To encourage investment and consumption amid the pandemic, the Reserve Bank of India has kept the benchmark rates low, which has softened interest rates on loans and deposits. The current fixed rates range from 2.9% to 5.4% and rates of other small savings range between 6% and 7.5%.

The lockdowns and other curbs on movement of people have forced them to spend more time at home and this might be encouraging them to trade in stocks. Another reason could be the significant increase in global liquidity. This is reflected in the foreign institutional investor inflows in FY21, with total amounting to $36.18 billion.

The report says the share of savings in shares and debentures to total household financial savings, which was at 3.4% in FY 2019-20, is likely to increase to 4.8% to 5.0% in FY 2020-21. As a percentage of GDP, it increased from 0.4% in FY 2019-20 to 0.7% in FY 2020-21. However, it is much lower than in countries like the US (36.5%).

A bubble?

However, this boom has come against a backdrop of India’s economy suffering its first full-year contraction in 40 years. In its annual report for FY21, the Reserve Bank of India warned about a possible stock market bubble.

The central bank noted that the prices of risky assets in many countries have touched record high levels during 2020-21 on the back of unparalleled monetary and fiscal stimulus levels. This could have “unintended consequences” in form of inflationary asset prices. “This order of asset price inflation in the context of the estimated 8% contraction in GDP in 2020-21 poses the risk of a bubble,” the central bank said.