The Economic Survey 2024, led by Chief Economic Advisor V. Anantha Nageswaran, has delved into the ongoing debate over futures and options (F&O) trading, or derivatives.
"Derivatives trading offers the potential for substantial gains, appealing to humans' inherent gambling instincts and potentially increasing income if profitable," the survey notes, while stressing the uncertainty of profitability. This prospect, it adds, is likely driving active retail participation in the derivatives market.
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Many investors are drawn to 'options' trading due to its smaller lot sizes and the potential for unlimited profits.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are closely monitoring the rising activity in equity derivatives. SEBI Chairperson Madhabi Puri Buch recently emphasized that the regulator is "compelled" to warn against speculative bets in the F&O segment, as it has become a significant issue affecting the broader economy. SEBI's study revealed that investors lose money in 9 out of 10 F&O trades.
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RBI Governor Shaktikanta Das remarked that the volumes in the derivatives market might surpass India's nominal GDP.
The Economic Survey cautions that globally, derivatives trading often results in investor losses. It stresses the importance of raising investor awareness and providing continuous financial education to highlight the low or negative expected returns from such trading.
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"A major stock market correction could lead to significant losses for retail investors in derivatives, potentially causing them to feel ‘cheated’ by unseen forces," the survey warns. "This may deter them from returning to the capital markets for a long time, which is detrimental to both them and the economy."
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The survey advocates for a measured and orderly development of the financial market, warning against rapid financialization. It cites the 2008 global financial crisis and the Asian financial crisis of 1997-98 as examples of the adverse effects when financial market innovations outpace economic growth. It stresses the need for India to ensure a gradual evolution of its financial markets to avoid similar crises.
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