In recent years, Indian stocks have hit several record highs, and the Nifty 50 Index has doubled in five years. The otherwise deserted Indian market is flooded with millions of retail gamblers eager to become rich overnight.
The “stock craze” craze in the Indian stock market in recent years is attracting millions of retail investors to enter the market.
Since 2020, Indian stocks have reached several record highs, continuing the strong gains that began in the previous calendar year. Currently, the market value of Indian stocks is over 5 trillion US dollars.
Analysts believe this is mainly due to the strong participation of Indian retail investors. The number of retail investor accounts in India has more than tripled since 2020 to about 0.16 billion. Especially among young people, it is becoming popular to buy stocks and options like crazy.
The Indian market, which was originally deserted, is now bustling, and there is an influx of gamblers who want to become rich overnight. Some analysts worry that the Indian stock market is overvalued, and there is a risk that the bubble will burst.
This dream of “getting rich overnight” has attracted millions of retail investors
Over the past few decades, the Indian stock market has been viewed as a relatively closed and less dynamic market. Compared with other major stock markets such as the US and Japan, it is relatively unattractive.
However, in recent years, the Indian stock market has undergone drastic changes. An epic “bull market” is brewing, and this once humble market is gradually becoming a global capital market craze.
Over the past five years, India's stock market benchmark index, the Nifty 50 Index, has more than doubled, outperforming major global stock markets. Over the past three years, the MSCI India Index traded at an average 58% premium over the MSCI Asia (excluding Japan) Index.
The outstanding performance of the Indian stock market has made it increasingly popular with overseas investors. The data shows that in May 2024, the average daily trading volume of India's Nifty 50 index futures surpassed the trading volume of the US S&P 500 index futures.
Under the money-making effect of this round of strong bulls, more and more retail investors are feverishly pouring into the market. Since 2020, the number of investor accounts in India has more than tripled to around 0.16 billion, according to data from HSBC Assets. The mutual funds industry's net assets under management doubled in May to reach 59 trillion rupees ($706 billion).
Even, many young investors don't want to miss out on this round of “getting rich” opportunities, learn to trade through social media and online platforms, and speculate using cheap derivatives. Research by Ashish Gupta, chief investment officer of Axis Mutual Fund, found that active traders in the Indian stock market surged from less than 0.5 million before the pandemic to 4 million last year. Most of them are under 40 and mostly from small cities in India.
Why did India's “stock craze” come about?
Analysts pointed out that there are many reasons for the influx of retail investors into the Indian stock market. First, India's economy has grown rapidly in recent years, and the modernization of the capital market has been realized. With the introduction of online transactions and centralized clearing, electronic stock records have replaced paper stock certificates, which are easy to falsify.
The Indian stock market hit several record highs in 2024, continuing the strong rebound that began in the previous calendar year. Notably, the first-tier indices have maintained a continuous upward trend over the past three years, mainly due to the active participation of Indian retail investors.
Analysts believe that this provides a good foundation for the stock market to develop. Residents' disposable income has increased, and India's middle class continues to expand, putting surplus savings into the stock market and mutual funds.
The strong financial performance of Indian companies also supported the market. Australian banking and asset management company Macquarie (Macquarie) estimates that India's earnings per share will grow 14% this year and next, surpassing other emerging markets. It is also less difficult for India to obtain loan capital. Last month, J.P. Morgan Chase included government bonds in the Emerging Markets Index for the first time, which is expected to attract billions of dollars in foreign capital inflows.
Furthermore, the Indian Stock Exchange continues to increase the attractiveness of the stock market, launch new derivatives, and reduce the minimum options trading size. This, along with the desire for quick returns, has sparked a surge in retail investors and an unprecedented surge in investment enthusiasm. According to Bank of America data, the average nominal trading volume of Nifty 50 index options this year was around $1.64 trillion per day, surpassing the S&P 500 by $1.44 trillion.
Is it a myth of a national carnival, or is it a bubble illusion?
Under the booming bull market, various hidden dangers are also accumulating. Some analysts have expressed concern about the rapid expansion of the Indian market and the speculative behavior of retail investors.
Some analysts worry that the rise in the Indian stock market may fuel a speculative bubble similar to the bursting of the European internet bubble in the early 2000s and frighten off a new generation of investors, which may end in severe market adjustments.
Farley Capital partner Andrei Stetsenko (Andrei Stetsenko) said that “when the inevitable adjustments arrive,” capital inflows into India's mutual funds may be hit.
Some investors are concerned that the MSCI India Index has a high premium, like the GameStop boom for US retail investors in 2021.
Furthermore, hundreds of millions of Indians still face high unemployment, stagnant wages, and a widening gap between India's wealthy elite. This made them bet on high-risk, high-return stocks because the dream of becoming rich overnight was more appealing to them. Zero-date rights (derivatives that expire on the day of creation) have become the most popular investment in the market.
“There's a lot of speculation, and it sounds like a casino,” said Raamdeo Agrawal, chairman of Motilal Oswal. “The public is actually selling put options and restructuring call options. This is insane.”
A cheap way to obtain options. Its leverage supports low expenses and high returns, but it also amplifies the risk of loss. Gupta called it a “gamification” of the stock market. He believes that retail investors in India often lack investment experience and have insufficient understanding of the risks of options trading, which increases the risk of market collapse.
However, some analysts are optimistic about the Indian stock market, believing that the majority of participants in the Indian stock market are still mainly middle class or wealthy Indian people, so there is still plenty of room for growth. Although the number of investor accounts in India reached around 0.16 billion, only 7% of Indian household financial assets hold stocks or mutual funds, according to asset management company Polen Capital. This indicates that there are still a large number of households that have yet to enter the stock market.
Andrei Stetsenko said:
There is always a risk of adjustment, but the benefit of doing so is that it's an opportunity to increase positions you believe in.