F&O trade: Luxurization of F&O trade must be reconsidered to protect household savings: CEA

New Delhi: Warning against household savings being invested in futures and options trading, Chief Economic Adviser V Anantha Nageswaran on Saturday said there is a need to reconsider the extravagance of F&O trading. Because it requires a different level of financial literacy. Speaking at CII’s Annual Business Summit 2024, Nageswaran said that whenever the development of the financial sector outpaced national development, the story did not end well in other countries either.

“The Asian crisis of 1997-98 is a very important example,” he said.

“When we pride ourselves on having the world’s largest trading volume in futures and options (F&O), we need to ask ourselves whether that is a sign of progress or a sign of concern,” the CEA said.

He said the financial sector has a responsibility to ensure that capital markets grow in areas that can actually leverage Indian household savings for productive purposes.

“A lot of people in the markets right now don’t understand this… The massification of futures and options is something that needs to be reconsidered because the financial knowledge required to trade stocks is very different from trading futures and options.” Nageswaran said. Sachetisation refers to the process of delivering financial products and services into smaller, more manageable packets. Net household savings fell sharply by Rs 9 billion in three years to Rs 14.16 billion at the end of fiscal 2022-23, according to government data. The data shows that investments in mutual funds have almost tripled in three years from Rs 64,084 crore in 2020-21 to Rs 1.79 lakh crore in 2022-23. Household investment in stocks and private bonds almost doubled in three years from Rs 1.07 billion in 2020-21 to Rs 2.06 billion in 2022-23.

Finance Minister Nirmala Sitharaman warned earlier this week that an ‘unchecked explosion’ in retail F&O trading could potentially spell trouble for household finances.

“Household finances have gone through a generational shift. We want to protect them,” she said, urging NSE, BSE and market regulator Securities and Exchange Board of India (Sebi) to work together to put in place strong compliance and regulatory standards. . It is in the interest of investors,” Sitharaman said.

In November last year, Sebi Chairman Madhabi Puri Buch had said she was “confused and surprised” by investor interest in F&O trade even though 90 per cent individuals were incurring losses in the sector.

Buch added that investors need to look long-term and that the odds of generating inflation-beating returns with this strategy are much brighter.

A survey by capital markets regulator Sebi last year found that only 11% of the 45.24 lakh individual traders in the F&O sector made a profit.

Participation in the F&O sector has grown exponentially during the pandemic, with the total number of unique sole traders increasing by more than 500% from 7.1 million in FY19.