Why in news?

India’s capital markets are undergoing a major shift as domestic household savings replace foreign institutional investment, reducing dependence on volatile global capital.

While this strengthens market stability, the rapid rise of inexperienced retail investors poses risks. As the country pursues “Viksit Bharat 2047,” concerns remain over whether a market driven by uneven participation and modest returns can truly support inclusive and sustainable economic growth.

What’s in Today’s Article?

• Domestic Investors Becoming the Market’s New Anchor
• Primary Markets Surge on Domestic Capital Strength
• Unequal Wealth Distribution and Rising Risks for New Investors
• Correcting Access Asymmetry in India’s Financial System
• Strengthening Market Structures and Governance
• Data-Driven Inclusion and Targeted Policy Support

Domestic Investors Becoming the Market’s New Anchor

• Foreign Portfolio Investor (FPI) ownership has fallen to a 15-month low, while domestic Mutual Funds and retail investors are reaching record levels of market participation.
• SIP inflows continue to surge, and individual investors now hold nearly 19% of the equity market — the highest in over 20 years.
• This growing domestic base is stabilising markets and cushioning volatility, as reflected in the NIFTY 50’s strong performance in October.
• Policy Impact: Greater Flexibility for the RBI
  • With domestic money replacing volatile foreign capital, the Reserve Bank of India gains more policy room.
  • Record-low inflation and robust household inflows mean less pressure to defend the rupee and more scope to stimulate credit growth and balance growth–inflation objectives.
• A New Risk: Fragility Beneath the Stability
  • This policy comfort is not guaranteed. If household sentiment weakens or downturns hit vulnerable investors hardest, the very shift that stabilises markets today could trigger instability tomorrow.
  • Careful management is essential to ensure this transformation strengthens — rather than threatens — long-term resilience.

Primary Markets Surge on Domestic Capital Strength

• India’s primary markets are booming, with 71 mainboard IPOs raising over ₹1 lakh crore this fiscal year.
• Strong domestic confidence is driving record capital formation, as companies announce over ₹32 lakh crore in investments — a 39% jump from last year.
• Private sector participation now accounts for nearly 70% of these commitments, signalling robust economic momentum.
• Beneath the Boom: Concerns About Valuation and Risk
  • Despite strong growth, rising valuations raise red flags. IPOs such as Lenskart, Mamaearth and Nykaa reflect sky-high price-to-earnings ratios, prompting concerns that enthusiasm may be outpacing business fundamentals.
  • Retail investors, drawn into the excitement, risk taking on outsized exposure without fully understanding long-term implications.
• The Advice and Performance Gap in India’s Investment Landscape
  • The celebration of retail participation and mutual fund growth often overlooks the uneven quality of financial advice and unequal wealth outcomes.
  • Financial research underscores a persistent “performance problem” — most active fund managers fail to consistently outperform markets after adjusting for risk and fees.
  • This suggests that increased participation does not automatically translate into better returns, especially for less-informed investors.

Unequal Wealth Distribution and Rising Risks for New Investors

• Structural inefficiencies in India’s equity markets are deepening wealth inequality, as equity gains disproportionately accrue to higher-income groups with better financial access.
• The recent ₹2.6 lakh crore decline in household equity wealth raises alarm, especially if losses are borne by new, vulnerable investors.
• While rising retail participation is often viewed as financial democratisation, inadequate safeguards and weak financial literacy expose inexperienced investors to heightened risks.
• When market corrections inflict concentrated losses on first-time participants, long-term trust erodes, undermining both inclusive growth and overall economic demand.

Correcting Access Asymmetry in India’s Financial System

• India’s growing investor base requires more than higher savings — it demands solutions to the persistent “access asymmetry problem.”
• Protecting everyday investors means moving beyond mere disclosures to structural safeguards, including lower fees and wider adoption of passive, low-cost investment vehicles.
• With active funds holding 9% of the market versus just 1% for passive funds, reducing expense ratios and improving investor awareness of indexing are essential to addressing the broader “performance problem.”

Strengthening Market Structures and Governance

• Falling promoter holdings in the NIFTY 50 — now at a 23-year low of 40% — underscore the need to ensure that such trends reflect healthy capital raising rather than opportunistic exits.
• Enhancing corporate governance, transparency, and long-term stewardship is crucial to protecting domestic savers’ wealth and market confidence.

Data-Driven Inclusion and Targeted Policy Support

• Improving financial access requires granular, gender- and location-specific data to identify and address participation gaps.
• Bringing more women and underrepresented groups into the financial mainstream must become a core policy priority, not an afterthought.

The Path Forward: From Fund Mobilisation to Institutional Integrity

• India’s new market foundation—built increasingly on domestic savings—offers promise.
• But the next phase demands a shift from merely attracting capital to strengthening institutional integrity, deepening financial literacy, and addressing inherent asymmetries.
• Ensuring fair, inclusive, and informed participation is now a fiduciary necessity, not a peripheral goal.