Leverage in the financial markets

Hi @nithin , I saw one of your recent interviews where the anchor was asking you questions, trying to gauge the risk of leverage in the Indian stock markets. The anchor had focussed on the margin provided by the brokers and as you rightly said there isn’t left much.
But I feel the anchor and many others have missed out is the leverage provided by cheap personal loans being provided by banks. I personally know a lot of people who have taken out loans in 10-20 lakhs and invested in the stock markets.(These people entered when nifty was at 14k) Also, the increased liquidity in the global financial markets in the stocks, cryptos, nft etc may also be due to the low interest loans.
Now my question to you is, Is there any effect of cheap loans on the stock markets and the risk this poses and also, what if the market corrects along with increased interested rates( will it apply to them?) ? How do you think the banking system will be affected overall?

I am happy to hear everyone’s opinion on this idea. Please feel free to comment.

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Great observation Siddy. @anon75004691

One likely possibility is that market may already be factoring that the end of of easy money era is slowly coming to an end. (18500 to 16400) . This view is for the coming 1 year.

But if u see the big picture, with India still giving a + real yield. I believe we may settle btwn the 3-5% interest rate band if we want to be on par with developed economies in terms of access to money. The big devil in this picture is ofcourse how inflation plays out.

WIth India joining the global bond indices soon, I believe we are more or less likely to head lower than higher in the medium term w.r.t interest rates.

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There is a possibility that unsecured personal loans money has come to the market. It is almost impossible to estimate how much of this could have gone to the markets.

@Bhuvan this is definitely worth researching. Can we maybe see the trend of personal loans before Covid and post Covid? I don’t know if RBI publishes this data, but if they don’t maybe we can track a few large listed players and see what has happened. Maybe there is a way to estimate how much of that could have come to markets.

@anon75004691 leverage in the capital markets isn’t good for the markets in the long run. It isn’t good because drawdowns tend to get exaggerated and also force people out of selling their investments at usually the worst times (when markets are at the lowest). To see how the banking system could be affected, we need to somehow estimate how much of personal loan money could have come back to markets.

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Leverage is a feature not a bug.

[I meant this in sarcasm but one can take it seriously too and it will be the same.]

Have to infer through a few proxy data points, won’t be exact like you mentioned. I’ll try collating some data around this.

It feels like 2007 to me. Raging bull market and people calling me up to give loans, credit cards, loan transfers etc. There is certainly cheap money floating around. Then we know 2008 happened.

Leverage felt good when I started trading. But its a silent killer.

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Leverage is only good in day trading and that too limited say 4x max
but should be used with proper care