Retail investors’ confidence drops as Indian stock market faces biggest crash in 5 years

Stock market: Indian retail investors, the major force behind the significant rally in Indian stock markets post-COVID-19, are now at a crossroads as heightening global trade tensions, a relentless drop in their favorite mid- and small-cap stocks, and rising recession fears are testing their resilience.

The equity market boom, which began in April 2020, has attracted many investors to shift their focus to stock investing, leaving behind traditional savings options such as bank deposits. Many have achieved stellar returns, further influencing others to try their luck by investing their savings in equities, resulting in strong demat account additions and huge inflows into mutual fund schemes.

However, markets cannot maintain an upward trend indefinitely, they must correct to align with valuations. Sometimes, these corrections can extend for six months or even a year before bouncing back. The ongoing correction in the Indian stock market has continued for the last five months, pushing frontline indices to post their worst performances on record.

This is the biggest correction in the Indian stock market since COVID-19, with new investors witnessing their first major crash and a prolonged downturn, leading to significant portfolio losses.

In the last five years, individual investors have invested ₹4.4 trillion in the cash market, with additional investments also coming in via SIPs.

Greater participation in equities, coupled with strong gains generated by Indian equities in recent years, has increased household wealth by 40 trillion rupees in the last five years, data from NSE show.

However, the sustained drop in Indian stock market is testing the patience and resilience of retail investors, with experts projecting that a further, deeper correction in the local equities could hurt sentiment and spending by India's retail investors.

New demat additions hit 20-month low

Weak market sentiment is now reflecting in new demat account openings, with the pace of additions slowing in February. Only 2.26 million new accounts were added during the month, the slowest growth since May 2023 and the second consecutive month of decline, Moneycontrol reported. In January, demat account additions stood at 2.83 million.

As of February, the total number of demat accounts registered with NSDL and CDSL has reached 190.40 million, up from 188.14 million in the previous month.

Looking at the volume figures, retail cash ADV has declined to approximately ₹300 billion from a peak of ₹500 billion, although these levels remain higher than in previous years.

Another measure of activity—cash delivery volume—has also dropped from peak levels. Lastly, the margin funding book indicates weak retail sentiment, though the decline is less pronounced compared to trading volumes, according to domestic brokerage firm Kotak Institutional Equities.

Retail options trading falls 20%

Apart from weak market sentiment, the decline in new demat account openings was also driven by reduced activity in the derivatives market following stricter regulations introduced by the Securities and Exchange Board of India (SEBI) to curb excessive F&O activity.

Kotak said that retail premium traded in January-February has likely declined by 20% compared to the pre-regulation average level (April-October). It noted that the premium decline is more significant (25%) for non-retail participants, largely proprietary traders.

Kotak also observed that the decline in contracts has been similar for both segments, at approximately 80%. "NSE’s January 2025 disclosures suggest that the impact of these regulations is evident in the distribution of retail investors based on premium traded: Retail participation at the lower end (< ₹1 million) has dropped more sharply (25%) compared to participation at the higher end (7%)," said Kotak.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.