‘Pray that stocks don’t fall’: Nithin Kamath warns Rs 1.1 lakh crore margin trading boom has worrying risks

Zerodha founder and CEO Nithin Kamath has flagged what he calls a “structural risk” building up in India’s equity markets, warning that the rapid growth of the margin trading facility (MTF) could amplify market stress during the next sharp correction.

In a detailed post on X, Kamath said MTF, a mechanism that allows investors to buy shares by borrowing from their broker against a margin, has expanded nearly five-fold over the last four years to more than Rs 1.10 lakh crore.

He noted that this growth has accelerated particularly after higher margins and securities transaction tax (STT) were imposed on derivatives trading, pushing leveraged activity into the cash market instead.


MTF, or margin trading facility, allows investors to purchase shares by paying only a portion of the total value upfront, typically 20 to 25%, with the broker funding the rest. Regulations permit leverage of up to five times on approved stocks.

Unlike derivatives, where positions are marked to market daily and typically short-term, MTF positions can be held for months, making risk accumulation slower but potentially more severe.

Kamath’s concern is not the existence of MTF itself, but the absence of a robust, system-wide risk model governing how it is offered and managed. According to him, competition among brokers has led to a “race to the bottom”, where almost every firm offers the maximum leverage allowed by regulation. Any broker that takes a more conservative stance risks losing market share. This, he argued, leaves little room for differentiated risk management.

He highlighted that MTF carries multiple risk multipliers compared with futures and options. Clients tend to hold positions for much longer periods, leverage is available across nearly 1,300 stocks including many illiquid names, and positions are overwhelmingly on the buy side. This makes it far harder to manage downside risk, especially during periods of stress.

Kamath also pointed to what he described as “insane” leverage when stocks are accepted as collateral. For example, an investor with Rs 1 lakh worth of shares could receive a collateral margin of around Rs 80,000 after haircuts. That collateral can then be used to take an MTF position of up to Rs 5 lakh, creating layered leverage that magnifies losses if prices fall sharply.

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The Zerodha founder warned that Indian equities tend to exhibit good liquidity during rising markets, but liquidity dries up rapidly during drawdowns. With limited short-selling through the securities lending and borrowing (SLB) mechanism, there is often no natural buying interest when markets reverse. In such conditions, forced liquidations can become self-reinforcing, particularly in stocks outside the top 200 to 300 by liquidity.

Sebi caps MTF exposure at 50% of a broker’s net worth plus borrowings, or up to five times net worth, to prevent broker-level failures. However, Kamath argued that while this protects the system from broker defaults, it does little to protect brokers from widespread client defaults during a sharp market fall.

Kamath noted that India has not experienced a 2008, 2015 or Covid-type shock since MTF scaled up to its current size. When such an event does occur, he warned, synchronised liquidations could lead to cascading price declines, especially in less liquid stocks.

“Someone asked me what the risk model is. I said there is none,” Kamath wrote, adding that relying on markets not falling is not a risk framework. His broader concern is that a significant portion of the interest income and even capital earned by brokers during the boom phase could be wiped out during a fast, disorderly correction.

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