Capital market may achieve three-fold growth by 2020

Going by developments in the last decade, the Indian capital markets could triple their current size by 2020, a FICCI-McKinsey report said here.

India's capital markets have undergone a dramatic shift in the last 10 years. Growth in equity markets has kept pace with India's GDP growth, and has provided a much needed impetus to the economy.

Continual strengthening of the capital market in the last ten years driven by a number of regulatory reforms, coupled with financial deepening in India has helped channel domestic and foreign savings towards capital formation, the report said.

Market capitalization has increased more than six-fold and trading value has more than tripled. Over the past five years, all three segments-retail, institutional and proprietary have broadly grown at more than 20%, the report said.

However, in order for the Indian capital markets to reach triple their current size, a number of several existing challenges will need to be overcome, it said.

India's capital markets lag behind those of other developed and developing markets in financial depth. Though the overall growth in the capital market seems healthy, there are several impediments to growth, it added.

Indian exchanges are also somewhat undiversified.

Equities and commodities comprise approximately 90% of trading volume. All other markets except Hong Kong have a much more diversified mix, with interest rate futures, foreign exchange futures and corporate bonds accounting for a sizeable share of exchange trading, it said.

Indian households also invest much less in equity markets than do their developed-market counterparts, particularly in the United States and United Kingdom.

As a result, retail equity ownership amounts to only around 10% of total equity ownership which has come down by 3% over the last seven years.

The report also noted that nearly 85% of the cash trading dominated in only four cities-Mumbai, Delhi, Ahmedabad and Kolkata.

Considering the minuscule contribution of the other top-350 urban centres, there is a huge opportunity to deepen the retail investor base in India, it said.

The limited capital formation and higher cost per trade are other challenges faced by the Indian capital market. In order to enable the market to triple in size by 2020, reforms are needed, it said.