 "RBI, Reserve Bank of India")
The Reserve Bank of India (RBI), in its financial stability report, has expressed concerns about the rally in mid and smallcap stocks, the rise in individual investors' participation in shares of smaller firms, and equity derivative (futures & options) trading, saying these three developments require close monitoring.
The report said that the rally in the mid, small and microcap segments was significantly larger than the gains made by the benchmark Nifty this year.
"During April-October 2023, the return on the Nifty Microcap Index was more than five times that on the Nifty 50. Over a three-year horizon, the performance divergence between Nifty 50 and other indices is even sharper,' the report noted.
Apart from their higher valuation compared to their largecap peers, around 69 per cent of the midcap, and 70 per cent of the smallcap stocks were trading at higher price-to-earnings (PE) ratios than their respective benchmark indices.
Moreover, in recent years, there has been a sharp rise in individual investors' participation in the equity market, particularly in shares of smaller firms.
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"In contrast to institutional investors, individuals’ investments in listed companies excluding the Nifty 500 is steadily increasing. As of September 2023, they owned 48 per cent of the floating stock of these firms," the report noted.
The retail investor appetite for mid and smallcap schemes is also evident from the rapid increase in the net inflows of mid and smallcap schemes of mutual funds. The largecap schemes of mutual funds have seen outflows in contrast.
The report further expressed concerns about the sharp rise in individual investors' participation in derivatives trading. The report said the number of active derivatives traders went up nearly six times from 2018-19 levels to 6.9 million by the end of October 2023.
"Empirical evidence shows that 9 out of 10 traders in the derivatives segment incurred losses and the average loss per active trader was 50,000 in 2021-22," the report noted.
