For the last few years, Indian traders enjoyed an era of cheap leverage.

Margin Trading Facility, popularly known as MTF, became one of the fastest-growing products in the broking industry. Traders got access to leverage at interest rates below 10 percent, making positional trading and swing investing far more attractive.

But the environment underneath the market is beginning to change.

A recent spike in Certificate of Deposit, or CD, rates may soon impact the entire leverage ecosystem. If liquidity remains tight, brokers may be forced to increase MTF interest rates in the coming months.

MTF rates to go up.

CD’s remain the top source for brokers to fund MTF. With CD rates hardening, high probability that MTF rates may go up too.

Sub 10% rates on MTF may soon be history. pic.twitter.com/NWUK5kswMb

— Ashish Nanda (@Ashish1Nanda) May 26, 2026

Sub 10 percent MTF rates may slowly become history.

What Are CD Rates?

A Certificate of Deposit is a short-term borrowing instrument issued by banks.

Banks raise money from institutions such as:

• Mutual funds
• Insurance companies
• Corporate treasuries
• Large financial institutions

In return, banks pay interest on these deposits for short durations ranging from a few months to one year.

The interest paid on these instruments is called the CD rate.

When CD rates rise, it means banks are paying more to borrow money from the market.

That increase eventually flows across the financial system.

It affects:

• Corporate borrowing
• NBFC funding
• Broker funding costs
• Margin funding businesses
• Retail leverage products like MTF

In simple terms, when the cost of money rises for banks and financial institutions, leverage becomes more expensive for everyone.

Why CD Rates Are Suddenly Rising

Recent reports show that one-year CD rates jumped nearly 60 to 70 basis points during May.

One-year CD rates are now quoting around 7.7 percent compared to nearly 7 percent earlier.

At the same time:

• Banking system liquidity has sharply fallen
• Credit demand has increased
• Markets are pricing in tighter liquidity conditions
• Treasury bill spreads have widened significantly

The gap between one-year CD rates and Treasury Bill yields has expanded to nearly 200 basis points compared to the historical average of 130 to 140 basis points.

This is an important signal.

It indicates that liquidity conditions inside the banking system are tightening rapidly.

And whenever liquidity tightens, the cost of leverage usually rises next.

How This Impacts MTF Rates

This is where traders need to pay attention.

Most retail traders think brokers simply lend money from their own balance sheet for MTF.

That is only partially true.

Brokers themselves borrow money through:

• Banks
• NBFC credit lines
• Commercial paper markets
• Treasury borrowing
• Institutional funding arrangements

A large part of these funding costs is linked directly or indirectly to money market rates such as:

• CD rates
• Repo rates
• Treasury bill yields
• Commercial paper rates

When these funding costs rise, brokers eventually pass those costs to MTF users.

The transmission chain is straightforward.

Tighter liquidity leads to higher CD rates.

Higher CD rates increase funding costs for brokers.

Higher funding costs lead to higher MTF interest rates.

Ultimately, retail traders pay more for leverage.

India’s MTF Industry Has Exploded

The timing becomes important because India’s MTF industry has grown at an extraordinary pace.

In your earlier article on MTF mechanics, the MTF book had already grown from ₹6,629 crore in 2020 to ₹72,634 crore by February 2025.

Since then, the growth has accelerated further.

Industry estimates now suggest that total MTF exposure across brokers has crossed ₹1 lakh crore.

Almost every major broker is aggressively pushing margin funding products:

• Zerodha
• Groww
• Angel One
• ICICI Direct
• Kotak Securities
• Dhan
• Upstox
• Sharekhan

After SEBI tightened F&O regulations, MTF became one of the biggest growth drivers for brokers.

Cheap leverage encouraged traders to take larger positional bets during the bull market.

Low funding costs made this possible.

Now the funding cycle appears to be turning.

Why Brokers Were Able to Offer Cheap MTF

The low interest rate environment helped brokers offer highly competitive MTF pricing.

Some brokers even offered rates below 10 percent.

This created a leverage boom among retail traders.

MTF became popular for:

• Swing trading
• Positional investing
• Momentum trades
• Midcap accumulation
• Event-based opportunities
• Bull market pyramiding

When money is cheap, leverage expands rapidly.

And Indian markets experienced exactly that phase during the post-2022 rally.

But leverage works best only when liquidity remains abundant.

The Cost of Leverage Is Starting to Rise

Now the equation is changing.

If broker funding costs rise by:

• 50 basis points
• 75 basis points
• 100 basis points

those increases usually get passed on to traders over time.

A broker currently offering:

• 9.75 percent MTF

could eventually move toward:

• 10.5 percent
• 11 percent
• 12 percent

depending on liquidity conditions.

Initially, the increase may appear small.

But financing costs compound significantly for leveraged traders.

The Hidden Cost Most Traders Ignore

Consider a trader taking:

• ₹10 lakh exposure through MTF
• Using ₹3 lakh personal capital
• Borrowing ₹7 lakh from the broker

At 9 percent interest, yearly financing cost becomes approximately ₹63,000.

At 12 percent interest, the same position costs nearly ₹84,000 annually.

That is an additional ₹21,000 cost without any increase in position size.

Now combine higher financing costs with:

• Sideways markets
• Delayed breakouts
• Midcap corrections
• Weak momentum
• Volatile markets

Suddenly leverage becomes far less attractive.

This is especially true for traders holding positions for longer durations.

Rising MTF Rates Could Change Market Behaviour

Expensive leverage changes trader psychology.

When borrowing costs rise, traders usually reduce aggressive exposure.

The first areas affected are typically:

• High beta stocks
• Midcap momentum trades
• Smallcap speculation
• Long-duration leveraged positions

Traders gradually shift toward:

• Lower leverage
• Faster profit booking
• Better quality stocks
• Shorter holding periods
• Tighter risk management

This often reduces speculative excess in overheated segments of the market.

Regulators Are Watching MTF Growth Closely

The rapid growth of MTF has already attracted attention from regulators and market veterans.

The concern is simple.

Leverage works smoothly during bull markets.

But during sharp corrections, leverage can amplify market stress.

If markets fall sharply while funding costs are rising simultaneously, traders may face:

• Margin pressure
• Forced liquidations
• Higher interest burden
• Faster capital erosion

This becomes even more dangerous when liquidity conditions are tight.

Recent discussions within the industry suggest regulators are carefully monitoring the rapid rise in margin funding exposure across brokers.

What Traders Should Monitor Now

There are three important indicators traders should closely track over the next few months.

1. CD Rates

This is now becoming one of the leading indicators for future leverage pricing.

If CD rates continue rising, MTF rates may also rise gradually.

2. RBI Liquidity Conditions

Watch for:

• Banking system liquidity
• Repo rate signals
• Treasury bill yields
• Bond market movements
• RBI liquidity operations

Liquidity tightening eventually flows into retail leverage products.

3. Broker MTF Announcements

Watch for:

• Changes in MTF interest rates
• Revised leverage slabs
• Changes in eligible stocks
• Higher maintenance margin requirements

Initially, these changes may happen slowly.

Then they often become industry-wide.

The Bigger Shift Happening in Indian Markets

Indian retail investing matured during a period of:

• Easy liquidity
• Cheap leverage
• Strong risk appetite
• Aggressive participation

Now markets may slowly enter a different phase.

A phase characterized by:

• Tighter liquidity
• Costlier leverage
• Greater financing discipline
• Selective risk-taking

This does not mean MTF is bad.

MTF remains a powerful tool when used responsibly.

But traders must understand an important reality.

The profitability of leveraged investing depends not only on stock selection but also on the cost of money.

And right now, the cost of money is beginning to rise.

Final Thoughts

The rise in CD rates may appear like a technical treasury market story.

But beneath that headline lies an important shift for Indian traders and investors.

The era of ultra-cheap leverage may slowly be ending.

If liquidity tightens further:

• Sub 10 percent MTF rates could disappear
• Holding leveraged positions may become costlier
• Speculative trading activity could reduce

The MTF explainer already explained how leverage amplifies both gains and losses in the market.

Now a new layer is emerging.

The cost of leverage itself is beginning to rise.

And that could become one of the biggest themes for Indian traders in the coming quarters.