High retail investments in stock market may help finance India’s infra needs


Rising retail participation in the stock market can enable to create a larger resource pool for financing India’s infrastructure requirements, according to an SBI Ecowrap report.

It further said that in case retail investments in the stock market increases to 1 per cent of GDP and further even if half of this can be tapped and channelised into infrastructure spending, then it can cover around 24 per cent of the IBER (other than railways) of the government in FY22.

“Other option for financing infrastructure that is also being explored is the InvIT (Infrastructure Investment Trusts). Government owned Financial Institutions like PFC, REC etc. are setting up InvITs and providing equity capital for new projects. These are all positive developments in the long term financing story of India,” said the report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

The report noted that with the onset of pandemic and subsequent lockdown, household financial savings had initially showed a significant jump in Q1 FY21, and then a sharp moderation in Q2 FY21. However, the data shows that currency in circulation again increased in Q3 and Q4 FY21.

Furthermore, the markets have progressively improved with Sensex increasing from 28,265 at the beginning of April 2020 to above 52,000 now, it said. This has led to increased investment in stocks and mutual funds in H2 FY21 and this higher retail participation in stock markets may become more of a self-fulfilling prophecy.

The number of individual investors in the market has increased by a whopping 142 lakh in FY21, with 122.5 lakh new accounts at CDSL and 19.7 lakh in NSDL. Furthermore, another 44.7 lakh retails investor accounts have been added during the two months of this fiscal.

Also, the share of individual investors in total turnover on stock exchange has risen to 45 per cent from 39 per cent in March 2020, as shown, by NSE data.

Within retail, maximum allocation has been to financials, followed by consumer staples, energy and IT. Globally, there has been significant increase in the market capitalization in stock markets across the world in the last one year.

However, in India it has been higher than other major countries. The market capitalization of Sensex has increased by 1.8 times its value one year ago. However, sector-wise 1-year return in Indian stock markets indicates that IT and Materials have performed better and IT.

“This clearly indicates the movement in Indian stock markets is increasingly being clearly interlinked with a supposed infrastructure power play in coming days.”

There is also a renewed interest in healthcare stocks and of course financial stocks with stories of Indian financial ecosystem being effectively acting as a conduit of large liquidity finding investment avenues.

Lower rate in other saving avenues amidst the low interest rate regime has led to greater interest by individuals in the stock market.

Another reason could be the significant increase in global liquidity, it noted. Additionally, the pandemic which has resulted in people spending more time in their homes might also be another reason for individuals’ tilt towards the stock market trading.

The Ecowrap report, however, said it is yet to be seen if this increasing retail participation is transitory or the beginning of long-term behavioural change. Additionally, the rise in stock market without significant development in real economy may raise issue of financial stability which as per our financial stability index shows modest improvement in April 2021, but lower than the peak witnessed in December 2020.

However, it is expected to have declined in May 2021.