A New Base of Savings in India as Domestic Capital

(Prelims: Current Events of National Importance)
(Mains, General Studies Paper 3: Indian Economy and Planning)

Context

A profound structural shift is taking place in India's capital markets. Domestic savings are now replacing foreign institutional investors (FIIs), reducing Indian markets' dependence on volatile global capital.
While this shift strengthens market stability and provides policy flexibility to the Reserve Bank of India (RBI), the growing number of inexperienced retail investors, uneven participation, and volatile valuation rates could hinder inclusive and sustainable economic growth for the country's goal of a 'Developed India 2047'.

The market share of foreign portfolio investors (FPIs) has reached a 15-month low, while domestic mutual funds (MFs) and individual investors are showing record levels of participation.
Increase in Individual Shares: Individual investors now hold approximately 19% of the equity market, the highest in more than 20 years.
Importance of SIPs: Investments through SIPs (Systematic Investment Plans) are steadily increasing, a testament to the growing confidence of retail investors.
Market Stability: This increase in the domestic market base is stabilizing markets and reducing volatility, as reflected in the strong performance of the Nifty 50 in October.

The replacement of volatile foreign capital with domestic currency has given the Reserve Bank of India greater policy independence. Record-low inflation and strong household incomes mean there is less pressure to defend the rupee. This gives the RBI more room to stimulate credit growth and balance growth-inflation objectives.
However, this policy stability conceals a danger: if domestic sentiment weakens or the market turns bearish, sensitive investors may resort to panic selling, which could turn the very change that currently stabilizes markets into volatility in the future.

Strengthening domestic capital has led to a strong surge in the primary markets. More than ₹1 lakh crore has been raised through 71 mainboard IPOs this fiscal year.
Capital Formation: The country is experiencing record capital formation, with companies announcing investments of over ₹32 lakh crore, a 39% increase over the previous year.
Private Sector Leadership: The private sector accounts for nearly 70% of these commitments, indicating strong economic momentum.

Rising valuation rates are a concern despite strong growth. Recent IPOs like Lenskart, Mamaearth, and Nykaa have very high price-to-earnings ratios (P/E), raising concerns that market euphoria is overshadowing business fundamentals. Driven by enthusiasm, retail investors take excessive risks without fully understanding the long-term consequences.

Celebrating the growing participation of retail investors often overlooks the uneven quality of financial advice and uneven wealth outcomes.

Performance Problem: Financial research consistently shows that most active fund managers fail to consistently outperform the markets after adjusting for risk and fees. This suggests that increased participation does not automatically translate into better returns, especially for less informed investors.
Uneven Distribution of Wealth: Structural inefficiencies in India's equity markets are deepening wealth inequality as equity gains disproportionately accrue to those in higher income groups with better financial access.
Threats to New Investors: Retail investor participation is seen as financial democratization, but inadequate safeguards and poor financial literacy expose inexperienced investors to increased risks. The recent decline of ₹2.6 lakh crore in domestic equity assets is worrying, especially if first-time investors suffer losses, which could impact long-term market confidence.

India's growing investor base not only needs more savings but also needs a solution to the persistent problem of access inequality.

Structural Safeguards: Protection of ordinary investors should go beyond mere disclosure and include lower fees and the widespread adoption of passive/low-cost index funds.
Reducing Costs: Active funds account for 9% of the market, while passive funds account for only 1%. Reducing expense ratios and raising investor awareness about indexing is essential.
Governance and Transparency: The decline in promoter holdings in the Nifty 50 (at a 23-year low of 40%) highlights the need for enhanced corporate governance and transparency to ensure the distinction between healthy capital raising and opportunistic exits.
Target-Based Inclusion: The need for detailed, gender-specific, and location-specific data to include more women and underrepresented groups in the financial mainstream.

India's new market foundation, increasingly based on domestic savings, offers promise, but the next phase requires moving beyond simply attracting capital to strengthening institutional integrity, deepening financial literacy, and addressing underlying inequalities to ensure that growth is inclusive and sustainable.