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  • Writer's pictureGAM Team

Why is it important to increase participation in equity markets (in India)?

Stock market is an important part of the economy of a country. The stock market plays a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. That is the reason that the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view. The stock exchange is a mediator that allows buying/selling of shares. To trade in the equity share market, you will need to have the proper tools - open a demat and trading account, have funds to buy stocks and a good broker platform to execute the trades. Thanks to technological advancements, you can do online equity trading, at your home, office or even while on the move.

A rising stock market is the sign of a developing industrial sector and a growing economy of the country. So, the stock market is not only providing the much required funds for boosting the business, but also providing a common place for stock trading. It is the stock market that makes the stocks a liquid asset unlike the real estate investment. It is the stock market that makes it possible to sell the stocks at any point of time and get back the investment along with the profit. This makes the stocks much more liquid in nature and thereby attracting investors to invest in the stock market.

Participation in Indian Market:

A strong financial market with broad participation is essential for a developed economy. For a developing economy like India, the resources of the Companies can be raised from the public through the markets. India's household savings, one of the highest in the world at 30%, can be channelised through equities, bonds and other instruments to achieve greater financial inclusion and improve the financial markets in India.

In India, FIIs have a positive impact on the stock market, business transparency and governance norms. Developing countries have strengthened their stock market to attract foreign capital flows. FII is a short-term investment by foreign institutions, in the financial markets of other countries. These institutions are generally mutual funds, investment companies, pension funds and insurance houses. FIIs strengthen and sustain the stock exchanges and provide a better price for the scripts but at the same time, heavy withdrawal of FIIs will create an adverse effect in the share price and in the Indian rupee.

Yields on the US 10-year Treasury rose to 1.7 per cent for the first time since January 2020 on Thursday (18th Feb). The American central bank said on Wednesday (17th Feb) it expected higher economic growth and inflation in the US this year. It, however, reiterated its pledge to keep the interest rate near zero. Foreign portfolio investors (FPIs) net bought shares worth Rs 1,258.47 crore on Thursday, while their domestic peers were sellers to the tune of Rs 1,116.17 crore.

David Rubenstein, the billionaire co-founder of one of the world’s largest private equity firms, The Carlyle Group, says doing business in India is not easy, yet he sees higher upside potential for private equity investors in the country compared with that in China.

Another discouraging fact is the lack of transparency in the system. Though exchanges and other market infrastructure institutions (MIIs), such as depositories, and regulators have a repository of data, it is not available to the public.

No information on geographical spread of investor base or demat account coverage is disclosed to the public Due to these structural hurdles, the advantages of capital markets have not reached many in the country, but this was all before Covid-19.

In January 2021 alone, 1.7 million new demat accounts were added, the highest monthly increase since September 2019 when 1.9 million accounts were opened.

As of January, India’s total demat accounts stood at 51.5 million, compared to 40.8 million at the end of FY20 and 35.9 million in FY19. According to Ajay Menon, chief executive, broking and distribution, Motilal Oswal Financial Services, the growth in the number of retail investors and the surge in demat accounts is due to multiple reasons. “The most common reasons have been people having more disposable income as well as free time to trade as most of them were working from home. Markets were volatile and at low points during the start of FY21 because of which first-time investors and millennials have been grabbing the opportunity for short-term gains and an alternative source of income," he said.

Smooth and easy access to stock markets because of technology, such as e-KYC (electronic-know your customer) and Aadhaar e-signing helped the retail investor community grow, said experts. We can hope that the participation in Indian equity markets do not fall from the current rate and the public savings are put to the best use as Stock markets promote investment. The raising of capital allows companies to grow their businesses, expand operations and create jobs in the economy. This investment is a key driver for economic trade, growth and prosperity.

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