Following the recent market drop and volatility, the blistering pace of new Demat registrations has slowed dramatically. According to data, only 2.65 million accounts were opened in May, a significant decrease from the 3.63 million opened in November.
According to Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd, market performance is the key driver of increased account opening. The broader markets have underperformed recently, with many steep falls in mid-cap and small-cap companies discouraging potential investors. Growth is also slow due to last year’s high base and the fact that several significant IPOs have already concluded.
Many people opened demat accounts in order to apply for significant IPOs such as Life Insurance Corporation of India and Paytm (One 97 communications Ltd). According to analysts, the rate of new IPOs has also decreased, and this is affecting demat account opening.
According to Deepak Jasani, head of research at HDFC Securities Ltd, demat account openings may remain poor in the short term. According to Jasani, the opening of a new account is determined by two criteria. The first factor is the quantity of people who have a sufficient investible surplus. Most of these folks have already already registered accounts, therefore fresh account opening is slowing. As the economy grows, the number of such persons will increase, driving up account opening.
The second point is that there should be visibility on the returns that will entice people to invest in markets, and market volatility may have discouraged many. People are keeping away from markets since the markets have corrected dramatically, with the Sensex and Nifty down 4-5 percent year to date in 2022, and broader markets down even more drastically.
Experts believe that because of the pandemic breakout and lockdowns, many people, particularly young people, were interested in stock markets, resulting in an increase in account openings. According to Sandip Raichura, CEO of retail broking and distribution at Prabhudas Lilladher, brokerages were launching various campaigns prior to this rise in account openings. The long-awaited LIC IPO is also over, thus fewer accounts are being opened presently.
Raichura, on the other hand, feels that long-term demat account opening trends would remain strong because India remains an under-invested country. He noted that the numbers are projected to stay equally solid over time as more people enter the equity markets directly and indirectly through mutual funds, and demat account openings to remain healthy, albeit perhaps not as much as previously. According to Khemka, as equity penetration increases, so will the number of demat account openings.
Meanwhile, rising interest rates may tempt investors to seek alternative investments if stock market returns do not improve.