Not all household savings funnelled into F&O trading: RBI

The Reserve Bank of India clarified that not all household savings are being funnelled into the F&O segment, and the growth of the equity market doesn't necessarily correlate with declining household savings at a post-monetary policy conference held on Thursday. This statement comes amid tighter regulations from SEBI and the government to curb retail participation in the derivatives market.

"In F&O, people are looking only at the margins...it is not as if the entire savings amount is going into the F&O so that is something on F&O that we have to remember,” the RBI governor Shaktikanta Das said responding to a question.

Responding to another question, deputy RBI governor Michael Patra said that there doesn't seem to be much exposure to equities in household savings when looked at from a different perspective.

“So, what is actually happening is that there is a churn going on of the precautionary savings that were made during COVID,” he added. During COVID, financial savings were high when there were no avenues to spend, the deputy governor indicated that it is these savings that are being used up and brought down to more normal levels. He added that another aspect to be kept in mind is that these financial savings are being shifted to physical savings such as the growing number of houses being bought.

He thus concluded that whether the equity derivatives segment rises or not, a return to normalcy in household savings behaviour can be seen due to these shifts. “If you take both (aspects) of them together then the total household savings has stabilised at around 20% it was falling for quite a while now (but) it has stabilised,” added the deputy governor.

The RBI governor noted that alternative investments are becoming more attractive to retail customers, raising concerns about the widening gap between bank deposits and credit growth, which could lead to asset-liability or liquidity management challenges for banks. The governor thus advised banks to focus more on the “mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network.”

“I'm not by any chance suggesting that people should make more deposits in the banks, not go for the equity market. It is left to the people to decide, it's left for the investor, and it is left for the saver to decide where he wants to put the money all that I am saying is that the banks need to focus on this,” RBI governor said during the conference.

During the conference, the governor shared that the RBI and SEBI had already discussed concerns over rising equity trade volumes within the early warning group of regulators and that SEBI will take appropriate action. In June this year, the governor had expressed concerns that derivatives market volumes might have exceeded India's nominal GDP.

This heightened retail interest is underscored by the fact that Indian markets account for 30% to 50% of global exchange-traded derivative trades. A recent study by SEBI revealed that out of the 92.5 lakh retail traders of the derivatives market, only 14.22 lakh made a net profit, meaning approximately 85 out of every 100 traders incurred losses. SEBI has thus raised the minimum contract size for F&O to Rs 20 lakh and limited weekly options contracts. Earlier in the month, the Economic Survey warned against F&O trading, equating it to gambling and questioning its place in a developing country like India. In the Union Budget, the government increased the securities transaction tax (STT) on securities to 0.02% in futures and 0.1% in options.