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Indian equity markets show signs of recovery, report finds

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Indian equity markets are showing signs of recovery, with equity market capitalization expected to exceed 2008 levels in 2009 at USD1.9trn, according to a report by Celent.

Indian equity markets are showing signs of recovery, with equity market capitalization expected to exceed 2008 levels in 2009 at USD1.9trn, according to a report by Celent.

However, the report says the market is still some way off the 2007 high of USD3.3trn and that Indian capital markets need to continuously improve to be internationally competitive.

Celent says the Indian market continues to hold promise, as the economy is expected to grow above five per cent even in the current economic downturn. India’s leading stock exchange, National Stock Exchange, is ranked third worldwide in terms of the number of equity trades in 2008, and is expected to overtake Bombay Stock Exchange in market capitalization in 2009.

According to the report, the NSE is preferred by foreign institutional investors, while retail investors, domestic brokers, and sub-brokers prefer the BSE. NSE turnover is two times that of the BSE because foreign institutional investors hold on to shares for a shorter period of time than their local counterparts.

In spite of growth, however, the Indian corporate debt market is underdeveloped and lags far behind debt markets in developed and emerging economies worldwide. At an expected turnover value of USD70bn in 2009, it is equal to less than ten per cent of the government debt market.

"The Indian markets are becoming multidimensional. As opposed to being just an equity market growth story, we also have the development of the derivative and the debt markets," says Anshuman Jaswal, Celent analyst and author of the report. "The early success of the currency futures market is another sign of the Indian capital markets’ increasing maturity. The reintroduction of interest rate futures is the next eagerly awaited development."

The report also found that the size of the Indian retail equity market has been overestimated by the industry. In the last decade, it has become mandatory to trade using demat accounts. This allows a better estimation of the size of the retail investor market, which is around 15 million. However, if inactive accounts are excluded, this is expected to be closer to eight million – significantly below the industry consensus of 25-30 million.
 
In the equity derivatives market, volatility has meant that the investors prefer to trade more in index derivatives because they are far more liquid than stock futures and options. Index futures and options now comprise 64 per cent of the trading done in futures and options. Just like equities, the equity derivatives market has also recovered, and the turnover in FY 2010 is expected to be around USD3trn, close to the figure in FY 2008. The growth in turnover and volume has made NSE one of the top ten derivatives exchanges in the world. Having one of the highest growth rates in 2008 (56 per cent), it is expected to do even better in the future. In spite of being more complex a product than cash equity, the equity derivatives market is quite popular with retail investors, and they had more than 50 per cent of the market share consistently throughout the period of June 2008 to May 2009. This bodes well for the breadth of participation in the market, Celent says.
 
According to the report, interest rate futures are expected to be reintroduced before the end of 2009. The Indian capital markets have been undergoing incremental reform, and once currency futures have established themselves, the Reserve Bank of India, the central bank, the Securities and Exchange Board of India, and the capital market regulator plan to establish new regulations and reintroduce interest rate futures.
 
For the interest rate futures market to succeed, banks should be allowed to trade, Celent says. Futures failed miserably in 2003 because the banks were only allowed to hedge. As the main participants in these markets, banks should be allowed to trade and build up the demand-side of the market.

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