Record Retail Leverage Raises Concerns As Cash Market Activity Moderates

Indian retail investors are entering the stock market with record levels of borrowed money even as signs of cooling trading activity begin to emerge. According to CareEdge Ratings, the average Margin Trading Facility (MTF) book climbed 57.6% year-on-year to an all-time high of ₹1.36 lakh crore in June. It also rose 7.1% from May, extending a steady run of monthly growth despite softer cash market activity.

The report comes at a time when the broader market has seen profit booking after a strong rally. CareEdge said the rise in leveraged positions reflects continued investor confidence, but warned that a sharp increase in market volatility could put these positions under pressure if stock prices reverse.

Why Is The Leverage Build-Up Significant?

The MTF book has expanded consistently over recent months, rising from ₹1.13 lakh crore in March to ₹1.14 lakh crore in April, ₹1.27 lakh crore in May and finally ₹1.36 lakh crore in June. In comparison, it stood at ₹0.86 lakh crore a year ago.

At the same time, cash market average daily turnover fell 6.7% from May after increasing for three straight months. CareEdge attributed the decline to profit booking, limited fresh market triggers and cautious investor sentiment amid geopolitical tensions and global economic uncertainty.

What Could Happen If Volatility Returns?

CareEdge said the combination of record leverage and slowing cash market momentum could become a concern if markets witness a sharp correction. Renewed geopolitical tensions in West Asia or prolonged uncertainty could hurt investor sentiment and slow the pace of MTF growth.

The report noted that the NSE continued to dominate the segment with more than 96% of total MTF volumes, while the BSE posted faster annual growth on a much smaller base. Looking ahead, the Reserve Bank of India's revised liquidity framework, which came into effect in July, may also influence trading activity by increasing brokers' working-capital requirements. Despite near-term risks, CareEdge expects rising retail participation and wider adoption of MTF to support long-term growth.

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