BSE, Angel One, MCX shares tumble after RBI action against leveraged trading

The Reserve Bank of India has tightened rules on bank loans to proprietary traders and stock brokers — a move that may curb leveraged trading.

India’s $5.2-trillion stock market has had a soft start to the year, and it could face further pressure as new regulatory measures to moderate trading activity add to existing concerns about corporate profit growth and foreign flows.

The Reserve Bank of India wants to protect banks’ balance sheets from rising stock market volatility. (Reuters)

Late Friday, the Reserve Bank of India tightened rules on bank loans to proprietary traders and stock brokers, a move that may curb leveraged trading. Earlier this month, taxes on equity derivatives were raised, unsettling markets, and the market regulator later hiked margins for a popular trading strategy.

Together, these measures come just as a US trade deal had begun to lift sentiment. The market has been trying to recover from its weakest start to a year in a decade, with investors already concerned about modest earnings growth, a rout in software services stocks and relatively high valuations.

The authorities are “attempting to de-risk the system, so no undue excesses are built and even if there are accidents, there are no large ramifications,” said Jimeet Modi, chief executive of Mumbai-based Samco Group. “There will be short term impact but in the long-term, the blow-up risk goes down.”

The National Stock Exchange of India Ltd., the country’s top stock exchange, will likely bear the burnt of the RBI’s move, as sliding trading volumes weigh on profitability just as the company prepares to go public after a decade-long wait. The bourse reported a 37% decline in profit in the December quarter, while revenue slid 10% from a year earlier.

Smaller brokerages and proprietary trading houses, which run on wafer-thin margins, will feel impact. Larger broking firms are likely to turn to alternative funding channels, creating faster growth opportunities in structured products and lending solutions for wealth managers, Citigroup Inc. analysts Dipanjan Ghosh and Kunal Shah said in a note.

Still, for the central bank, the measures signal its intent to protect banks’ balance sheets from rising stock market volatility globally driven by geopolitical tensions and evolving impact of artificial intelligence on businesses.

The tightening is “a prudent step toward reinforcing systemic stability,” said Ajay Kejriwal, executive director at Choice International Ltd., a Mumbai-based brokerage. “For the broader broking ecosystem, the impact remains largely contained.”