Zerodha cofounder Nithin Kamath has warned that the rapid rise of margin trading facility in India could worsen selloffs in small and midcap stocks. He described it as the biggest risk brokers have faced since 2010.
Kamath explained that margin trading allows investors to buy shares by borrowing part of the amount from brokers. Zerodha’s margin trading book is nearly ₹9,000 crore, with about 50% of this in non F&O counters. These stocks are more risky because they often hit lower circuits, leaving brokers unable to liquidate collateral.
He said that in falling markets collateral values shrink, margin calls increase, and brokers may be forced to sell holdings. This cycle can push prices lower and trigger cascading selloffs. Kamath compared India’s situation with Korea, where rising leverage during rallies led to forced selling when prices reversed.
He pointed out that some brokers reportedly run margin trading books at nearly 500% of their net worth, raising systemic concerns. While regulators have introduced safeguards, Kamath believes the sheer scale of leverage in non F&O stocks makes the risk significant.
His warning highlights how margin trading, meant to boost participation, could instead amplify volatility and deepen downturns in small and midcap stocks if not controlled.