Retail investors speculating for higher returns in stock market, says Eco Survey 2024: FD rates not enough for survival?

The Economic Survey 2024 has sounded a word of caution for retail investors going overboard in investing their hard earned money in the stock market. Though the returns have been robust so far, investors’ expectation of future returns may be running ahead of time. The Economic Survey recommends a cautious approach in managing stock market return expectations for retail investors.As per the Economic Survey 2024, “While the outlook for India’s financial sector appears bright, some areas will require focused attention going forward. The significant increase in retail investors in the stock market calls for careful consideration. This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern. For a developing economy such as India, the financial sector needs to support the banking sector and fill the gap in capital required for the economy’s growth. Therefore, the financial sector should expand at a pace that is in lockstep with economic growth. In particular, India can ill-afford the economy’s over financialisation at its current development stage.”

Individual investors today are over 9.5 crore and have nearly 10 per cent direct ownership of the market through its almost 2500 listed companies. This translates to around .36 lakh crore of wealth as of March 2024, apart from indirect ownership in equity mutual funds that have .28 lakh crore in assets under management (AuM).

The registered investor base at NSE has nearly tripled from March 2020 to March 2024 to 9.2 crore as of 31 March 2024, potentially translating into 20 per cent of the Indian households now channelling their household savings into financial markets.

It is important to note that the Reserve Bank of India (RBI) has hiked key policy rates such as repo rate, Standing Deposit Facility (SDF) by 2.50% between May 2022 and February 2023. The repo rate has been kept unchanged at 6.5% since February 2023.

According to RBI data, between May 2022 and May 2024, the interest rates on new fixed deposits (FD) increased by 2.44%, leading to nearly full transmission of policy rate hikes.The transmission of the repo rate hike to FD rates seems to be nearly complete. However, retail investors are not finding it attractive enough. There has been a noticeable shift in household investment preferences from traditional bank FDs to the stock market.RBI Governor Shaktikanta Das recently said that slower deposit growth may create structural liquidity problems for banks. “Households and consumers who traditionally leaned on banks for parking or investing their savings, are increasingly turning to capital markets and other financial intermediaries,” said the Governor in an event. “On their part, banks have sought to fill the credit-deposit gap by increasing their reliance on other sources like short-term borrowings, certificates of deposits etc,” he said.

Bank credit growth was at 13.9% year-on-year while deposit growth was at 10.6% over the same period, as per the latest RBI data as on June 28, 2024.

The Economic Survey 2023-24 has been tabled by the Finance Minister Nirmala Sitharaman in Parliament today, July 22, 2024.