‘Breakeven point moves higher’: Zerodha's Nithin Kamath on MTF costs after RBI funding curbs

‘Breakeven point moves higher’: Nithin Kamath on MTF costs after RBI funding curbs

• RBI raises MTF norms, demands more cash collateral from April 1
• Brokers warn higher costs will be passed to customers
• New rules may reduce leverage, impacting trading volumes

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Stockbrokers are reassessing margin trading facility (MTF) offerings after the Reserve Bank of India tightened funding norms, mandating fully secured credit and higher cash collateral from April 1.

In a post on X platform on February 18, Zerodha co-founder, Nithin Kamath, said traders often underestimate the combined impact of interest and brokerage costs while using MTF, particularly over short holding periods. “MTF is a leveraged product, so you are already taking significant risk. If you don’t pay attention to costs, the breakeven point moves higher,” Kamath wrote, sharing a chart that showed how modest price moves can fail to cover charges.

The remarks come days after the RBI amended lending norms for brokers, mandating that all funding be on a fully secured basis with at least 50% collateral in cash or cash-equivalent instruments. The revised framework, effective April 1, replaces earlier structures that allowed brokers to rely more heavily on bank guarantees and stock collateral.

Kamath had earlier warned about the rapid expansion of MTF, which has crossed Rs 1.1 lakh crore in outstanding exposure, arguing that aggressive leverage, thin broker capital buffers and competition-driven pricing could amplify risks during market corrections. In a February 16 post, he said the new RBI rules would raise funding costs for brokers, which would “eventually be passed on to customers”.

Kamath accompanied the post with a comparative table illustrating how MTF costs can vary sharply across brokers even for identical trades: Assuming a Rs 10 lakh equity purchase, funded with 50% borrowing (Rs 5 lakh), held for 30 days. This is factoring in only MTF interest and brokerage charges. In Zerodha’s case, the interest cost is of about Rs 6,000 for 30 days, with brokerage capped at Rs 20 per order. Thus, taking the total cost to roughly Rs 6,040.

By contrast, hypothetical examples of other brokers — using higher per-order brokerage or uncapped percentage-based fees — pushed total costs to Rs 8,000 to Rs 8,500 for the same trade, despite comparable or even lower daily interest rates.

The comparison highlighted that brokerage structures, not just headline interest rates, can materially shift breakeven levels in leveraged trades, especially over short holding periods. Such cost differences become more pronounced when leverage is used repeatedly or for marginal price moves.

The regulator’s move is part of a broader push to rein in leverage across capital markets, following recent curbs on futures and options trading. Market participants say MTF had remained an area where leverage was underpriced, allowing investors to multiply exposure using equity collateral, with limited downside buffers during volatile phases.

Brokerages are already signalling operational and profitability pressures. Brokerages have said the tighter collateral framework could make bank-funded MTF unviable, while Kotak Securities has flagged the possibility of reduced credit availability, favouring larger, well-capitalised players. Therefore, pushing high-growth retail brokers are expected to revisit pricing and margin structures as borrowing costs rise.

At HDFC Securities, managing director and chief executive Dhiraj Relli indicated that derivatives volumes could fall 15 to 20% after April, with knock-on effects for leveraged products such as MTF. Separately, Motilal Oswal has warned of lower “capital efficiency” for MTF users as higher haircuts and the withdrawal of intraday funding reduce buying power.

For retail investors, the immediate impact is higher effective costs. Even in relatively stable markets, traders using leverage may find that fees and interest consume a larger share of returns, particularly in low-volatility trades.

While the tighter rules are expected to cool volumes in the near term, market participants say the intent is to reduce the risk of forced liquidations and broker-level stress during sharp market moves. As Kamath put it, brokerage costs in leveraged trades “add up faster than most people realise” — a reality the new framework is likely to make more visible.