Surge in Demat Accounts in India as Stock Market Rallies

In May, 2.2 million demat accounts were opened, lifting the total to 196.6 million, marking the first rise since December 2024. This uptick aligned with a stock market rally, as Nifty, Sensex, and broader indices saw strong gains, and trading volumes hit an eight-month high at ₹1.19 trillion. IPO activity also revived with ₹8,983 crore raised. However, analysts caution sustained growth depends on market stability, retail participation, and broker investments, with challenges like global uncertainties and limited brokerage budgets tempering momentum.

In May, the Indian stock market witnessed a resurgence of investor enthusiasm, reflected in the opening of approximately 2.2 million new dematerialized (demat) accounts. This brought the total number of such accounts to an impressive 196.6 million. Notably, this marks the first monthly uptick in account openings since December 2024, reversing a four-month decline from January through April. Industry analysts predict that the total number of demat accounts could surpass the 200-million milestone by mid-July, driven by ongoing market activity.

Market Rally Attracts Fresh Investors

The recent surge in demat accounts coincided with a strong performance in Indian equities. May saw the benchmark indices, Nifty and Sensex, each climb by nearly 2%. Broader market indices outshined these gains, with the Nifty Midcap 100 rising by 6.1% and the Nifty Smallcap 100 surging by an impressive 8.7%. This robust market performance reinvigorated investor interest, as evidenced by a notable rise in cash segment volumes.

Trading volumes in the cash segment reached an eight-month high, with the average daily trading volume across the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) increasing by 11% month-on-month to ₹1.19 trillion. This represents the highest trading activity since September 2024, when volumes hit ₹1.3 trillion.

IPO Market Revival Spurs Investor Engagement

The initial public offering (IPO) market, a crucial driver of retail investor participation, also showed signs of revival in May. After two months of subdued activity, six companies collectively raised ₹8,983 crore through IPOs. This was a marked improvement compared to the absence of IPOs in March and the single listing in April. However, despite these developments, the pace of new demat account openings in May remained below the 12-month average of 3.3 million accounts.

Challenges to Sustained Growth

While the recent uptick in demat accounts is encouraging, analysts caution that a return to the peak growth levels of 3 million accounts per month may not be imminent. Prakarsh Gagdani, CEO of Torus Financial Markets, highlighted that the market's penetration has been remarkable, with over 196 million accounts opened in a relatively short timeframe. However, he raised concerns about whether retail investors are reaping consistent profits from the market.

"The benchmarks have struggled since late September last year, and retail participation typically increases only when benchmark indices show sustained gains," Gagdani explained. He also pointed out that brokerages are facing financial pressures, which limit their ability to spend on customer acquisition. Declining brokerage profits have led to reduced marketing budgets, further dampening the growth of new accounts.

Outlook for the Coming Months

Looking ahead, a few factors could influence the trajectory of demat account growth. Large IPOs scheduled for the current quarter could attract more retail investors, but their pricing and demand will play a crucial role. Additionally, global and domestic uncertainties, coupled with limited positive economic news, continue to weigh on investor sentiment.

While a recent 50-basis-point rate cut offers some relief, experts believe it may take another quarter or two before demat account growth approaches its previous highs.

In conclusion, while May’s surge in new accounts and market activity is a positive development, sustaining this momentum will depend on broader market stability, retail investor confidence, and strategic efforts by brokerages to engage new participants.