Stock exchange daily cash volumes fell over 20% in FY23, most in 11 years

Daily cash volumes on the stock exchanges fell over 20 percent in FY23, the steepest decline in 11 years, as equity market volatility weighed heavily on investors.

The combined average daily turnover in the equity cash segment of the BSE and the National Stock Exchange of India stood at Rs 57,700 crore, representing a decline of 20.4 percent from the previous year, according to Bloomberg. This was the most substantial fall since FY12 and the first decline since FY16, when there was a 5.4 percent drop.

Investor participation declined sharply in FY23 due to expectations of higher interest rates by global central banks to tackle inflation, geopolitical tension, and more recently, the failure of banks in the US. Domestically, the Adani saga, continued selling by foreign investors and expectations of earnings cuts due to the El Nino possibility this year dampened investor sentiment.

Vinod Nair, head of research at Geojit Financial Services, noted that investments by foreign institutional investors and retail investors dropped considerably due to the global selloff and the weak performance of domestic equities.

Despite this, mutual funds maintained strong inflows due to support from retail investors with an insight on long-term returns and prudent investment management.

Rebound coming

Although sentiment in the market is pessimistic, the overall outlook is not as bleak, analysts said. The recent rise in interest rates has not yet been fully factored into the cost of funding for banks and financial institutions, production costs and the debt of the manufacturing and service sectors, they said.

However, analysts said they expect a strong market rebound once interest rates stabilise over the course of a few quarters and inflation eases. This could occur by the second half of FY24, they suggested.

Anmol Das, head of research at Teji Mandi, emphasised that investor participation is closely linked to market performance. During the pandemic, the global tech-driven rally resulted in a 70 percent increase in average daily turnover in FY21. This growth coincided with an 80 percent rise in the benchmark indices from pandemic lows and an almost 22 percent increase from pre-pandemic levels.

A similar trend was observed in FY18, when the average daily turnover increased by 39 percent and the market delivered broad returns of 20 percent.

According to Das, market performance significantly influences investor participation. Given the current macroeconomic scenario and the availability of a wide range of investor apps, it is only a matter of time before investor participation returns, Das added.

Analysts said this year will be especially challenging for investors seeking significant returns, prompting them to focus on large-cap stocks that promise long-term, high returns. Banking, IT, cement and other growth sectors are regaining the spotlight, given the lack of significant developments in the near term. Additionally, next year's elections are expected to spur public sector enterprises to offer more stable and better returns.

Meanwhile, volumes in the derivative segment remained close to all-time highs in every month since last year. The average daily turnover in the derivative segment was Rs 150.67 lakh crore so far in FY23, up 120 percent from Rs 68.35 lakh crore in FY22.

Analysts suggested that many market traders have been active in the options segment because of the belief that options yield substantial profit with minimal investment. As a result of this interest, the popularity of FINNIFTY weekly options is also on the rise. It's expected that this trend will persist