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May 18, 2024

Reconsidering Sachetisation of F&O Trade to Protect Household Savings: CEA

Chief Economic Advisor V Anantha Nageswaran has emphasized the urgent need to reconsider the sachetisation of futures and options (F&O) trading to safeguard household savings. Speaking at the Confederation of Indian Industry’s (CII) Annual Business Summit in 2024, Nageswaran expressed concerns over the increasing engagement of household savings in F&O trade, highlighting the requirement for different financial literacy levels compared to traditional stock trading.

Nageswaran pointed out that when the financial sector’s development outpaces national development, it often leads to adverse outcomes. Citing the Asian financial crisis of 1997-98 as a cautionary tale, he stressed the importance of ensuring that the financial sector’s growth aligns with broader national interests. He questioned whether India’s pride in having the world’s largest trading volume in F&O signifies progress or a potential concern.

Impact on Household Savings

The shift in household savings trends is evident from government data, which reveals a sharp decline in net household savings by ₹9 lakh crore over three years, bringing it down to ₹14.16 lakh crore at the end of the 2022-23 fiscal year. Conversely, investments in mutual funds and shares have seen significant increases. Mutual fund investments almost tripled to ₹1.79 lakh crore in 2022-23 from ₹64,084 crore in 2020-21, while household investments in shares and debentures nearly doubled to ₹2.06 lakh crore from ₹1.07 lakh crore over the same period.

Sachetisation and Financial Literacy

Nageswaran highlighted the concept of sachetisation, which refers to making financial products and services available in smaller, more manageable packets. While this approach can democratize access to financial markets, it also demands a higher level of financial literacy, particularly for complex instruments like futures and options. Many current market participants lack the necessary understanding of these instruments, raising concerns about the potential risks to their savings.

Government and Regulatory Responses

Finance Minister Nirmala Sitharaman recently echoed these concerns, warning against the unchecked growth of retail F&O trading. She emphasized the need to safeguard household finances, urging exchanges like NSE and BSE, along with the Securities and Exchange Board of India (Sebi), to implement robust regulatory standards to protect investors’ interests. Sitharaman stressed the importance of generational financial security and called for collective action to mitigate the risks associated with high-risk trading.

Sebi Chairperson Madhabi Puri Buch also expressed surprise at the high investor interest in F&O trading despite the significant risk of losses. Buch noted that 90 percent of individual traders in this segment lose money, according to Sebi research. Only 11 percent of the 45.24 lakh individual F&O traders made profits, highlighting the need for a long-term investment perspective to achieve inflation-beating returns.

Pandemic-Induced Surge in F&O Participation

The pandemic has seen an exponential increase in F&O segment participation. The number of unique individual traders surged by over 500 percent from 7.1 lakh in FY19, reflecting a broader trend of retail investors seeking quick gains amidst market volatility. However, this surge also underscores the need for enhanced financial literacy and regulatory oversight to protect these new entrants from significant financial losses.

Conclusion

The Chief Economic Advisor’s call to reconsider the sachetisation of F&O trade is a timely reminder of the delicate balance required in financial market development. As household savings increasingly flow into high-risk trading segments, there is a pressing need for enhanced financial literacy and robust regulatory frameworks to ensure that these savings are utilized productively and securely. Safeguarding household finances must remain a priority to ensure long-term economic stability and growth.

Jhumpa Lahiri

Jhumpa Lahiri

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