Nithin Kamath, co-founder of India's largest discount broker Zerodha, has issued a stark warning about the stability of Indian equity markets, citing the rapid growth of margin trading funding (MTF) as a systemic vulnerability.
Kamath described the potential for a cascading failure akin to the 2020 South Korean market crash as his "biggest nightmare," suggesting that current leverage levels could amplify volatility during a correction.
Kamath argued that while regulatory frameworks have improved, the sheer volume of leveraged positions creates a fragile ecosystem.
The concern centers on the mechanics of MTF, which allows investors to borrow funds to purchase securities.
Kamath argued that while regulatory frameworks have improved, the sheer volume of leveraged positions creates a fragile ecosystem.
In a sharp downturn, margin calls could force a wave of automated selling, exacerbating price declines and potentially triggering a liquidity crisis among smaller brokers and investors.
This warning comes as Indian markets navigate a period of structural change.