Declining New Demat Account Openings
The chart given below shows the trend of declining new demat account openings. At its peak in January 2024, 4.68 million new accounts were opened, which dropped to 3 million by April, then rose again to 4.5 million by August-September. However, since the end of September, as the market has been declining, new demat account openings have also slowed down, now reaching 2.26 million.
Is This a Cause for Concern?
Despite the drop, 2.26 million new accounts in a falling market is still a significant number. This figure was similar in May 2023, after which the market saw a strong rally post-November 2023. While one could argue that a declining trend in new accounts signals a weaker market ahead, the correlation isn’t necessarily strong enough to make that conclusion.
Market Growth Beyond New Account Openings
India already has around 15-20 crore demat accounts, a sharp rise from 2-3 crore just a few years ago. Many of these may not be unique accounts, but the rapid expansion suggests that much of the available capital has already entered the market. While a younger workforce will continue to open new accounts, the market shouldn’t depend on fresh capital from retail investors as a support mechanism.
Balancing FII Outflows with Domestic Inflows
So far, domestic inflows have managed to offset foreign institutional investor (FII) outflows, but this won’t continue indefinitely. With FII holdings at decadal lows, there will be a point where selling slows down or reverses. If this happens alongside sustained domestic inflows, it could create a strong tailwind for the Indian market.
A Return to Normalcy?
Rather than viewing the decline in new demat accounts as a negative signal, it may simply indicate a return to normalcy after an overextended period of growth. The market could be heading for a consolidation phase in 2025 before resuming its upward trend. While these data points are useful, it’s important not to overanalyze them in isolation.
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