Indian equity markets struggle to attract retail investors amid volatility after budget

Despite expectations of a rebound in trading after the budget and volatility in Adani Group company shares and banking stocks, cash volumes in the local equity markets stagnated in February.

The combined average daily trading volume in the cash segment of both the National Stock Exchange of India and the BSE from February 1 to 24 increased 3.97 percent to Rs 54,114.69 crore from Rs 52,0474 crore in the previous month, which was the lowest in six months.

Average daily trading volumes in the futures and options (F&O) segment rose to a record Rs 204 lakh crore against Rs 202 lakh crore in January.

Trading volumes surged at the start of February, driven by budget announcements and increased volatility in Adani Group company shares and banking stocks. The instability was attributed to concerns among investors about the contagion risk resulting from the Adani Group's troubles, which affected both Adani Group shares and banking stocks.

When the budget was presented in parliament on February 1, the combined BSE and NSE turnover was lower than the previous year’s budget at Rs 9 lakh crore.

Although higher volatility typically leads to an increase in trading volumes, there has been no significant rise in trading during the rest of February.

Earnings, monsoon concerns

Analysts noted that retail participation remains low due to expensive valuations and fears of a potential cut in earnings in the upcoming March quarter. Additionally, concerns over below-normal monsoon rainfall amid possible El Nino conditions are increasing worries about rising food inflation.

These micro and macroeconomic headwinds are contributing to selling pressure, with analysts observing that the markets are experiencing downward pressure on each high.

“If we consider emerging markets, they are better tactical investment destinations than the Indian markets in terms of valuations, with a view of one or two years. On the macro side, the 10-year bond yield and the dollar index rapidly bounced back, which was not expected in the short term,” said Shrikant Chouhan, head of equity research (retail) at Kotak Securities.

According to the minutes of recent meetings of the US Federal Reserve and the Reserve Bank of India, policymakers are expected to maintain their aggressive stance on the rate hike trajectory in order to address higher inflation.

Analysts said some factors holding back retail investors are the decline in midcap and small-cap stocks, the rout in Adani Group stocks, and the lack of initial public offerings. According to analysts, the volatility is expected to slow the pace of demat account openings, even though about 2.2 million accounts were opened in January compared with 2.1 million in December.

In February, midcap and small-cap stocks declined 1.7 percent and 2 percent, respectively, following drops of roughly 2.7 percent and 2.5 percent in January.

BSE small-cap stocks have fallen by an average of 23 percent from their peak in October 2021. Of the top 500 stocks, 70 of them, or about 14 percent, are currently trading 50 percent lower than their respective highs in 2021.

Conversely, 121 of the top 500 stocks, or 24 percent, are trading at a higher value than their 2021 highs.

Poor breadth

“The breadth remains poor. The downtrend in stock prices has affected the morale of the retail trader. The fiasco in a well-known group has led to sharp losses and many traders are still nursing their recent bruises,” said Devarsh Vakil, deputy head of retail research at HDFC Securities. “Domestic institutions and high net worth individual investors are gradually absorbing the supply of stocks by foreigners. All the aforementioned factors have affected cash market volumes on the exchanges.”

According to analysts, central bankers have been compelled to increase interest rates due to the impact of rising inflation on the economy. However, this cycle of raising interest rates is expected to pause in the second half of the year.

In the meantime, corporate India is expected to continue performing well, with earnings on the rise. This will likely make valuations more attractive, resulting in a potential stock market rally. As prices begin to trend higher, retail traders are expected to re-enter the market, leading to a recovery in volumes, analysts suggested.