Speculative trading has no place in a developing country like India: Economic Survey

Derivatives trading loses money for the investors, said the Economic Survey 2024.

The Economic Survey has come down heavily on rising futures & options in the stock market by retail investors, using harshest words yet by a government agency, going as far to say that such speculative trading has “no place in a developing country” such as India. More importantly, it has warned the that any potential fall in stock markets could make investors feel cheated and deter them from returning to capital markets for a long time which could be detrimental to the entire economy.

The Survey noted that derivatives trading, with its potential for outsized gains, often appeals to the human instinct for gambling and the allure of augmenting income. This dynamic has driven significant retail participation in derivatives trading. However, the reality of derivatives trading is starkly different from its promise.

"Globally, derivatives trading loses money for investors, for the most part," the survey states. The allure of quick profits can be misleading, as the majority of participants in derivatives markets end up facing losses. This underscores the importance of raising investor awareness and continuous financial education. The survey emphasizes, "Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading."

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The risks associated with derivatives trading are not merely theoretical. A significant stock market correction can lead to substantial losses, particularly for retail investors engaged in derivatives. These losses could provoke a strong negative behavioral response, with investors feeling "cheated by unseen more considerable forces."

The Economic Survey warns that such experiences could deter retail investors from returning to capital markets for a long time, which would be detrimental to both their financial well-being and the broader economy.

The Economic Survey also provides a broader context for understanding the potential pitfalls of rapid financialisation. It points to historical precedents, noting, "The financialisation of economies has not ended well, even for advanced economies. The global financial crisis of 2008 is an obvious example."

For developing countries, the risks are even more pronounced. The survey cites the Asian financial crisis of 1997-98, which severely impacted the high-flying economies of the region. These examples illustrate the dangers when financial market innovations and growth outpace economic growth.

Also read | F&O frenzy in equities now turning into a stampede, warns Vijay Kedia

For India, the survey advocates for a cautious approach: "India needs to have an orderly and gradual evolution of the financial market." Such an approach is essential to avoid the destabilizing effects that have plagued other economies.

The survey calls on all stakeholders, including market participants, market infrastructure institutions, regulators, and the government, to ensure that capital markets fulfill their fundamental role of directing savings to productive investments. This is not only a matter of national interest but also of self-interest.

The survey concludes, "All stakeholders must ensure that capital markets play their theoretically assigned role of directing savings to their most productive investments. It is not just in the national interest. It is an act of self-interest, too."

Earlier this month, Moneycontrol reported that a SEBI working committee on F&O has proposed measures to curb the rapid growth in derivatives volume. These include increasing the minimum lot size of derivative contracts to Rs 20 lakh-Rs 30 lakh from the current Rs 5 lakh, restricting weekly options to one expiry per stock exchange per week, and limiting the number of strike prices for options contracts.

Last week, SEBI chairperson Buch said that the worry for the regulator is now not just from a “micro level” of the F&O trading putting investors at risk, but also from a “macro level” of it disrupting economic growth.

Buch said that turnover in index options in premium terms has gone up from Rs 4.5 lakh crore in 2018 to Rs 140 lakh crore in 2024. While overall turnover in the derivatives segment has gone up from Rs 210 lakh crore in 2018 to Rs 500 lakh crore in 2024.