The Reserve Bank of India has tightened lending rules for institutions engaged in proprietary trading of stocks and commodities and offering leverage to clients, marking the latest move by regulators to curb speculative market activity.

According to a notice published on the central bank's website late Friday, all credit extended to securities brokers must be backed by collateral, while loans to brokers for proprietary trading or investment purposes are now prohibited. The central bank stated that these prudential regulations for capital market intermediaries, such as stock and commodity brokers, will take effect on April 1.

The stricter measures will increase funding costs for proprietary trading firms and squeeze their profit margins. While Indian banks have traditionally not directly financed proprietary trading, the new directive closes a loophole: short-term working capital loans provided by banks can no longer be diverted by brokers for trading activities.

Citigroup analysts Dipanjan Ghosh and Kunal Shah wrote in a report that institutions related to capital market transactions, such as brokers, clearing members, and exchanges, could be affected. They noted that the proposals may raise capital requirements for brokers and professional clearing members, though the exact impact is difficult to assess at this stage. Data shows that last year, proprietary trading firms accounted for over 50% of stock option turnover on the National Stock Exchange of India. In cash equity trading, their share rose to about 30%, the highest level in 21 years.

India recently also announced plans to significantly increase the tax on equity derivatives transactions, with market analysts predicting that high-frequency trading profits will be adversely affected.