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Over thegdpipo GDPSEBISEBISEBIYour browser does not support the element. past five years India’s financial markets have undergone an extraordinary transformation. has been accompanied by a booming stockmarket, which has risen by around 80% in dollar terms. Tens of millions of Indians have become investors for the first time. The world’s most populous country is becoming a nation of shareholders. This revolution is welcome, but financial regulators are worried about sky-high retail use of speculative equity derivatives as markets have taken off. They are right.Rising incomes are not the boom’s only cause. Digital payments and trading apps mean that any Indian with a phone and cash can own slivers of listed firms. Since 2019 the share of has risen from 7% to 20%.Households can expect better long-term returns from listed companies than gold, property or bank deposits. For companies, a deeper capital market has improved funding. India generates only 3% of the world’s , but has been home to nearly a third of all public listings so far this year, which accounts for a tenth of the capital raised in s globally.Unusually among emerging economies, India has successfully translated economic growth into shareholder returns, letting ordinary investors benefit. Stocks there have roared since 2019, even as those in China have fallen by 15%. Analysts at Franklin Templeton, an asset manager, reckon that the correlation between Indian company earnings and growth is closer than in any other emerging market.But the good news comes with a health warning. Indian stocks are priced at 23 times their expected earnings over the next year, higher than those in America, but in a market with far fewer fast-growing technology stocks. No wonder foreign investors are now pulling out. Even more eye-catching is the explosion of equity derivatives. Four-fifths of equity futures and options trades in the world now take place in India.Derivatives are useful. They can help companies and investors hedge against all kinds of risk. But in India much of the volume comes from new retail traders. A study from the Securities and Exchange Board of India (), the country’s financial regulator, suggests that 91% of individual Indian investors in this market lose money. That is why has imposed new restrictions, some of which take effect this month. These will shrink the number of options contracts that brokers can offer, raise minimum contract sizes, and increase margin requirements on the day that contracts expire.The bar to putting limits on a market with willing buyers and sellers should be high. Short-term options contracts may be little more than a bet on whether the price of a stock will rise or fall on a given day, but investors should be free to make losses. Nonetheless, India’s regulators are right to be watchful.The boom in derivatives trading is drawing in people who are not financially literate. Trading is also big enough to endanger financial stability. Traders hop from one instrument to another as they expire, causing spikes in buying and selling, which both and the Indian central bank worry are amplifying volatility in the underlying stockmarket. The leverage taken on such options could also magnify downturns when markets shift against expectations, as traders are forced to sell securities to cover their losses.First-time investors have yet to face a slump; when it comes, regulators will face pressure to act. Their focus should be on financial stability rather than preventing losses. That would be the best way to protect India’s shareholder revolution.
