Rating agency ICRA has revised the Indian brokerage industry’s outlook to ‘stable’ from ‘negative’ on the back of improved equity cash volumes and broader based retail participation showing signs of revival among other reasons.
“Equity cash volumes have shown signs of improvement in third quarter of FY12-13 and beyond. Broader based retail participation is showing early signs of returning to the markets. The cash volumes recorded for the month of January 2013 were the highest since February 2012.
“Equity options, largely understood to be the forte of the more savvy institutional investors are attracting a steady trickle of the higher end retail investors,” said the report.
Diversification helps
The rating agency also pointed to the diversification strategy of brokerages and Government’s initiative paying off.
“The commodities and currencies segment are emerging as dependable avenues for diversification for brokers and the brokers have re-aligned their business models vigorously to contain costs. The Government stepping on the gas with regard to reforms initiative and declining interest rate scenario is doing much for improving investor sentiment.
“The month of January 2013 saw very strong FII inflows into the country. The disinvestment plans and planned public offerings may provide the much needed boost to investment banking and distribution operations,” the report added. However, the rating agency added that certain challenges would continue to bog the brokerage industry down.
“The underlying economic picture remains uncertain. In the absence of any strong global economic recovery, this phase of cautious optimism is largely contingent upon Government delivery of the reforms programme. Any let up in execution could mean that this build up of hope could unravel very quickly,” said the report.
The Indian brokerage industry’s flat revenue pool at Rs 10,500 crore for FY 12-13 compared with FY 11-12 despite the strong growth in options volumes remained a concern. The cash volumes and futures continued to slide and were lower even in absolute number during this period compared with the previous fiscal, according to a latest study by ICRA.
Budget proposal
The Union Budget 2013, amongst other proposals, has reduced Securities Transaction Tax on equity futures contracts to 0.01 per cent from 0.017 per cent, introduced commodities transaction tax (CTT) on non-agriculture commodities futures trading and allowed participation of FIIs in the currencies derivative segment.
In ICRA’s view, while these proposals could provide a fillip to equity derivative volumes as well as currency derivative volumes, the imposition of the CTT could impact the gross returns of the arbitrageurs by 20-30 per cent and consequently significantly impede the growth of the segment at least over the short-term.
According to MD and CEO Destimoney Securities, Sudeep Bandyopadhyay, while market uncertainty still remains, the increase in delivery volumes by 30-40 per cent in the first nine months of 2012 in the HNI and traders segment of the market has augured well for brokers.
“When confidence returned to the market people went in for delivery trades rather than options which helped the brokerage industry. However, now we see a dip in market participation again and concerns over GDP estimates, twin deficits and macro fundamentals are gaining ground. Once these concerns are addressed, we could see huge revival in brokerage industry again,” he added.