Capital Market Pressure to Persist Despite Markets Nearing Recent Highs: HDFC Securities' Dhiraj Relli

HDFC Securities CEO Warns of Challenging Environment for Capital Market Businesses

Despite benchmark indices inching closer to record highs, the operating environment for brokers, asset managers, and wealth firms is expected to remain challenging in the next financial year, according to Dhiraj Relli, Managing Director and Chief Executive Officer of HDFC Securities.

Relli noted that while the broader equity market backdrop is improving, earnings across the Street are already seeing downward revisions. The capital market entities may continue to face headwinds if market momentum does not sustain. If markets do not improve meaningfully, assets under management will come under pressure, and revenues will decline.

A key overhang remains in the derivatives segment, where higher securities transaction tax (STT) and regulatory changes are expected to weigh on trading activity. Relli stated that volumes will get impacted by around 20% due to STT and other changes.

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The industry is also bracing for tighter bank guarantee norms from the Reserve Bank of India, effective July 1, which are expected to materially alter leverage dynamics in the derivatives ecosystem. Approximately 35% of industry margin funding, or roughly Rs 3.5 lakh crore, is currently supported by fixed deposits and bank guarantees.

Under the revised framework, bank guarantees will need to be fully collateralised, with a significant portion backed by cash, effectively raising capital requirements for trading firms. This could translate into an additional 8 to 10% impact on derivatives volumes at the system level, over and above the hit from higher transaction taxes.

Relli also flagged that recent spikes in trading activity have been partly driven by elevated market volatility, with volumes likely to normalise going ahead even without regulatory headwinds, further weighing on growth expectations.

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On equities, Relli struck a more constructive tone, noting that valuations have turned more reasonable after a prolonged phase of time and price correction. The BSE Sensex and Nifty 50 are trading within striking distance of their all-time highs following a sharp rebound earlier this week.

"We are just about 10% away from all-time highs. We should get there in this financial year, possibly closer to Diwali," Relli said, pointing to a more favourable risk-reward environment for investors.

Relli acknowledged that the past 18 to 20 months have been challenging, with muted returns across both lump sum investments and systematic investment plans (SIPs). However, the correction has helped reset valuations, creating opportunities in select pockets of the market.

"At this time, risk-reward is favourable and valuations are reasonable. There is an opportunity to accumulate quality stocks at lower levels," he said.

Relli advised investors to avoid aggressive market timing strategies and maintain discipline in allocations. "It's never a great idea to catch a falling knife. Staggered investing should continue. Investors can also consider rotating from expensive stocks to relatively better-valued names within high-quality companies."

He also described the central bank's policy stance as constructive, noting that the Reserve Bank of India appears to have a firm grip on inflation and growth dynamics, with no immediate need for abrupt rate actions.