Higher F&O costs could dent trading activity, but earnings revival to drive markets: Raamdeo Agrawal

The recent changes impacting derivatives trading could make certain strategies less profitable and may temporarily affect market liquidity, veteran investor Raamdeo Agrawal, cautioned in an interaction with ET Now. While the broader budget has been well received, Agrawal said the timing of higher trading costs has added to near-term market jitters, especially at a time when earnings growth has moderated and global uncertainties persist.

Responding to concerns about whether the increase in trading costs could make futures and options (F&O) trading commercially unviable for some participants, Agrawal, Chairman & Co-Founder, MOFSL explained that profitability dynamics would inevitably change.

“See, any trade — the profitability of a trade goes down. In a trade, if you are spending say 500 bucks and you are expecting a profit of say Rs 1,000, so by spending Rs 500, maybe you will make now Rs 300 or Rs 200. Your cost itself will go up for the same trade. So, how the markets react to this situation because as the liquidity dries up, the cost of trade further goes up because the bid and ask spread goes up,” Agrawal said.


He added that it is difficult to predict how speculators will respond in this new environment, noting that even traders themselves may not immediately understand the full impact.

“So, what will be the total impact in the market and how the speculators will behave, I would not know because, in fact, speculators themselves will not know. We will see the activity as the time passes,” he said.

Agrawal pointed out that strong earnings growth could offset the impact of higher costs, but said the announcement came at a sensitive time for markets.

“If there is too much of a boom in the market — see the earnings growth is like 15%, 20%, 25% — then of course it does not matter that much about this particular incremental cost. But it was not timed well and it was not expected. More important was that it was not expected at this point of time because markets have become very important,” he said.

He highlighted that markets were already facing multiple pressures, including slower earnings growth, global trade-related concerns and a weaker currency.

“Market was a little jittery because of earnings slowdown and the trade fronts — whatever is happening — and currency is also weak. So, in that situation when this comes in, this is an added blow to the market. But market has weathered it well and impact hopefully is limited as we go forward,” Agrawal added.

On the broader market outlook, including the upcoming NSE IPO and persistent foreign portfolio investor (FPI) outflows, Agrawal downplayed the long-term impact of tax-related hurdles, calling them a short-term distraction.

“No, tax hurdle is only for today. I mean, you will forget it tomorrow, I am sure. Maybe even by 3:30 it will be done because the budget is so brilliant on every other aspect,” he said.

Agrawal praised the budget for its focus on fiscal consolidation, capital expenditure and technology initiatives, including artificial intelligence, and expressed optimism on India’s trade agreements.

“It is very balanced in terms of fiscal consolidation, in terms of lot of initiatives on the capex, and as I talked about AI and technology thing which could be very big. We just met the minister here and his confidence and commitment that the trade agreements — I mean, the trade agreement of EU and many other countries have already been concluded,” he said.

He added that markets appear well-positioned for a pickup in economic activity, citing encouraging high-frequency indicators.

“Look at the auto sales for January which is coming in. I think PV has done more like 40%, 45%. TVS has done 27-28%. M&M has done 25%. So, the economy is picking up. Credit flow is like at 13-14%. GST collection is up 6% despite the fact that they have cut the GST by 10%. So, economy is picking up,” Agrawal said.

He expects earnings momentum to strengthen over the coming quarters and said corporate performance will ultimately determine market direction.

“Earnings will pick up as we go forward in quarter four. Earnings this quarter will also be good. Next quarter will be even better. So, finally markets will do what the earnings do,” he said.

“If the earnings grow by 15% next year, I do not see any reason why the index will not go to 30,000 or something like that or 15-17% this thing. So, earnings are the most powerful thing and that actually this budget has only helped, not deterred,” Agrawal concluded.