As the margin trading facility book grows, the system must make sure that leverage remains backed by real capital and strong collateral

In Indian equity markets, trading with borrowed money, or margin trading, has become easier than ever before. What was once mainly available to high-net-worth investors is now available to ordinary retail investors as well through discount or full-service brokers. This has led to a sharp rise in margin trading in India. NSE data show that total daily outstanding under margin trading rose sharply after 2020, reaching about ₹1.16 lakh crore by April 2026.

Margin trading has both benefits and risks for the investor. The benefit is, it allows investors to take a larger position than their capital would otherwise permit. If the market moves in their favour, this can increase their profits. But it also increases risk. If the market swings against them, losses also become larger which may wipe out the investors’ capital. Investors in such situations also face margin calls, which force them to bring in more money or sell shares at a loss.

The same logic applies to the market as a whole. Margin trading can improve liquidity. By allowing investors to take larger positions, it increases buying and selling in the market. This can make it easier to trade without moving prices too much, lowering trading costs for investors. But it can also make the market more fragile i.e., increase systematic risk. Brokers keep collaterals in form of cash or share pledge for margin trading line given to the investor. When share prices fall, the value of these collateral falls. Brokers then ask investors to add more money or securities. If investors cannot meet these margin calls, brokers sell the shares bought on margin and/or liquidate the pledged shares. These forced sales add selling pressure, which pushes prices down further. That can trigger more margin calls and more forced sales — a self-fulfilling contagion. In this way, excessive margin trading can turn a normal market wide price correction into a sharper market fall.

Key questions

This is why regulators across the world track margin trading closely. Three questions matter most. First, how large is the margin book compared with the market? Second, how does it behave when market conditions change? Third, who is funding it?

The first question tells us whether the risk is small or system-wide. If margin borrowing is tiny compared with the overall market, forced selling may remain contained. But if it becomes large, a fall in prices can create wider stress. The second question is about timing. Margin trading often grows when markets are rising and investors feel confident. But the real test comes when markets fall or remain volatile. If the margin book shrinks slowly, the system may absorb the shock. But if the margin book remains high during a volatile phase, even a modest negative shock can trigger margin calls and forced selling, turning a normal market fall into a much sharper decline.

The third question is about where the money comes from. If margin trading is funded mainly by brokers using their own capital, the risk is concentrated in the broking system. If it is funded by bank credit, the risk can travel from the stock market into the banking system. That is why the source of funding matters as much as the size of the margin book.

India’s position on these three fronts is mixed. On size, the margin trading book is relatively small compared to developed markets: total daily outstanding under margin trading facility (MTF) was about ₹1.16 lakh crore on April 30, 2026, roughly 0.25 per cent of India’s market capitalisation. If we adjust for free-float market capitalisation, it becomes roughly 0.5 per cent. This is lower than in the US, where Financial Industry Regulatory Authority (FINRA) data show margin debt of about $1.30 trillion in April 2026, or roughly 1.7-2 per cent of market value.

On timing, however, India deserves closer attention because the MTF book has risen sharply since 2022 and remains high in a more volatile market. That means a negative market-wide shock could be amplified through margin calls and forced selling. On funding, the key issue is bank exposure. RBI data show that bank lending to the capital market sector rose to ₹2.81 lakh crore in 2025 from ₹0.93 lakhs crore in 2015. This does not mean the system is unsafe, but it does mean regulators should track who is funding the leverage, not just how much leverage exists.

The other side of risk

India has a margin trading boom, but it is not unregulated. The Securities and Exchange Board of India (SEBI) regulates the market side through eligibility rules, daily mark-to-market, margin calls, exposure limits, and volatility-linked margin requirements. The Reserve Bank of India’s recent changes now address the other side of the risk, who funds the leverage. This is the right direction. By requiring bank loans to brokers and capital market intermediaries to be fully secured, applying stricter haircuts to equity collateral, limiting banks’ capital-market exposure, and preventing banks from funding brokers’ proprietary trading, the RBI reduces the chance that stress in the stock market spills into the banking system.

The lesson is simple. Margin trading should not be discouraged. It improves liquidity and gives investors more choice. But as the MTF book grows, the system must make sure that leverage remains backed by real capital and strong collateral. RBI’s latest move is a timely step towards that balance.

The writers are faculty members at IIM Bangalore, TA Pai Management Institute, Bengaluru and IIM Ahmedabad, respectively

Published on June 24, 2026