Indian investors are borrowing at an unprecedented rate to fund their stock market bets, creating a large pocket of leverage that experts warn could pose risks to the ecosystem if the market turns. Latest data from CareEdge Ratings show that India’s total average Margin Trading Facility (MTF) book surged 65.4% year-on-year to hit an all-time high of Rs 1.27 lakh crore as of May 2026.On a month-on-month basis, the book rose 11.1%, surpassing its previous January high.The explosion in debt-fuelled stock purchasing comes at a peculiar time for Indian equities. While retail participants are doubling down on leveraged cash market positions, overall market trading volumes are flat, and FIIs have already pulled out Rs 2.8 lakh crore from Indian stocks this calendar year.The CareEdge report reveals that overall average daily turnover (ADTO) across futures & options (F&O) and equities remained stagnant sequentially, inching up by a marginal ₹0.2 lakh crore in May 2026. This stagnation was primarily triggered by higher securities transaction tax (STT) rates on derivatives trading, which significantly increased overall transaction costs.While a stabilizing situation in West Asia helped improve broader cash market sentiment, boosting cash market ADTO by 5.7% sequentially to ₹1.52 lakh crore, the underlying build-up of leverage is drawing sharp warnings from industry leaders.The relentless expansion of the MTF book despite choppy equity benchmarks has raised major red flags regarding the sustainability of this bull run.Also Read |Rs 1,100 crore a day nightmare: Why FIIs are ruthlessly selling bank stocksIn a tweet last month, Zerodha CEO Nithin Kamath highlighted the anomaly by saying that MTF books are growing across brokers despite the broader markets going nowhere. The underlying mechanics of how this leverage is being utilized present a compounding structural threat.MTF effectively acts as a double-edged sword for the market. PMS fund manager Devina Mehra of First Global explained the leverage dynamic in a recent column for ET:"If the broker is willing to provide let us say 3:1 leverage, the stock market participant can put up Rs 25 and buy a stock(s) worth ₹100. The Rs 75 is effectively a loan taken by the investor to fund their position. This borrowing or leverage enhances both the profit and the loss on the stock position."The illiquidity trapThe core anxiety for market observers is not just the quantum of debt, but where that debt is concentrated. A significant volume of borrowing has been positioned against highly illiquid, non-derivative assets. Nearly 50% of the entire industry's MTF book is comprised of non-F&O stocks.This creates a structural vulnerability. If a mid- or small-cap stock falls sharply, lenders make margin calls requiring borrowers to top up their funds. If those investors lack the ready cash to respond, brokers are forced to systematically liquidate the pledged collateral to protect their capital. Because these stock positions lack deep market depth, a mass liquidation event can trap participants with no exit.“While at an individual level, this appears like a containable problem when a large number of stocks fall, there are many margin calls that go out, the stock market participants often do not have ready cash to meet these margin calls. Indeed, if they had the cash they would not mostly have borrowed in the first place. Their positions are then sold in the market and this actually accelerates the fall further,” Mehra had explained earlier.Brokers on the hookIf these fast-moving down-circuits lock up stock liquidity, the financial damage quickly transfers directly to the intermediaries. If a stock drops past the provided margin (such as a 20% threshold), the resulting bad debit lands squarely on the brokerage.Kamath warned of the systemic danger this poses to the wider financial ecosystem. "The risk shoots up when the collateral is stocks. A customer pledges Stock A, gets 80% margin on it, and uses that to take further positions worth 400% in the same stock. If that stock is a mid or small-cap stock, circuits kick in, and there's simply no exit if markets turn around... If markets crash, brokers could end up holding losses from MTF positions they can't exit and that puts the entire ecosystem at risk."While intense competitive pressures are pushing discount brokerages to permit collateral margins for MTF purchases, exposure levels vary wildly across the sector. Kamath disclosed that while Zerodha's MTF book has grown over the last 16 months, it remains capped at roughly 25% of their net worth. However, for other brokerages across the street, that figure is flirting with 500%—the maximum exposure threshold permitted by the regulator."MTF seems like easy money for the brokers," Kamath stated. "But the Risk Management team at brokers has to make sure that on one bad day, you don't give it all back."According to data compiled by CareEdge, the National Stock Exchange (NSE) continues to dominate the MTF segment, holding a 96% market share, with its average book scaling to ₹1.22 lakh crore. Concurrently, the BSE registered a sharp 58.3% year-on-year uptick to Rs 0.05 lakh crore.While market activity remains structurally supported for now by easing geopolitical tensions, a major regulatory hurdle looms. The implementation of the Reserve Bank of India’s (RBI) revised regulatory amendments, deferred from April 2026, is now scheduled to kick in next month in July 2026.Analysts note that once this framework takes effect, it could significantly alter overall market liquidity, impact trading volumes, and test the endurance of bulls holding record-high leveraged positions.