India’s Capital Markets

India’s capital markets are witnessing a structural transformation in which domestic household savings are increasingly replacing Foreign Portfolio Investment (FPI) as the primary source of market liquidity. This shift has strengthened market stability and reduced vulnerability to global capital volatility, but it has also brought challenges related to investor protection, valuation risks, and inclusive participation, especially in the context of Viksit Bharat 2047.

The growing dominance of domestic capital has improved the resilience of Indian financial markets and enhanced policy autonomy. However, unequal participation, weak financial literacy, and governance concerns must be addressed to ensure inclusive and sustainable capital market growth.

Role of Domestic Savings in Shaping Indian Capital Markets

Shift in Market Ownership and Control

• FPI ownership in Indian equities has declined to a 15-month low of 16.9%, and to 24.1% in the NIFTY 50.

• Domestic mutual funds are recording consistent record inflows, supported by rising Systematic Investment Plan (SIP) contributions.

• Retail investors now own nearly 19% of the equity market, the highest share in over two decades.

• This reflects a shift in market power from volatile global capital to stable domestic savers, making markets less exposed to external shocks.

Expansion of Primary Markets and Capital Formation

• In FY 2025, domestic confidence is reflected in a strong primary market, with 71 mainboard IPOs raising over ?1 lakh crore.

• Corporate investment announcements increased by 39% year-on-year, with nearly 70% led by the private sector.

• This indicates improved domestic risk appetite, deeper capital mobilisation, and confidence in India’s growth prospects.

Improved Market Stability

• Domestic savings act as a long-term and stable source of capital, reducing volatility caused by sudden FPI inflows or outflows.

• During periods of global uncertainty, such as the October 2025 market rally, domestic flows provided a stabilising buffer.

• This enhances overall market resilience and investor confidence.

Greater Monetary Policy Autonomy for the RBI

• Reduced reliance on FPI flows has provided the Reserve Bank of India (RBI) with greater policy flexibility.

• The RBI can better:

  • Manage the growth–inflation trade-off

  • Expand bank credit

  • Reduce frequent interventions to defend the rupee

• However, this flexibility depends on continued household confidence and may weaken during sharp market corrections.

Overview of Financial Markets in India

Meaning of Financial Markets

Financial markets are platforms for trading stocks, bonds, currencies, and derivatives. They facilitate capital formation, investment, and economic growth.

Major Components

• Money Market: Deals in short-term instruments with maturity of less than one year.

• Capital Market: Facilitates long-term investment and includes:

  • Primary Market (issue of new securities)

  • Secondary Market (trading of existing securities)

• Foreign Exchange Market: Enables currency exchange for international trade and investment.

• Derivatives Market: Trades instruments like futures and options derived from underlying assets.

Key Challenges in Domestic-led Capital Markets

Investor Readiness and Financial Literacy Deficit

• A large number of new retail investors lack awareness of market risks, valuations, and cycles.

• Market corrections can lead to losses, weakening long-term trust in equity markets.

Valuation Excesses

• Several IPOs and new-age companies are priced well above their fundamentals.

• A reversal in sentiment may result in sharp corrections, disproportionately affecting small investors.

Low Investor Returns

• Most active mutual funds fail to outperform benchmarks after fees and risk adjustment.

• Passive investment options like index funds and ETFs remain under-utilised, limiting investor returns.

Unequal Participation in Capital Markets

• Equity ownership is concentrated among urban and higher-income households.

• This leads to unequal distribution of wealth, limiting the role of capital markets in inclusive growth.

Corporate Governance Concerns

• Declining promoter shareholding raises concerns about long-term commitment.

• Stronger governance and transparency are required to protect domestic retail investors.

Measures Required to Strengthen Capital Markets

Strengthening Investor Protection

• Enhance SEBI’s regulatory framework by moving beyond disclosure-based norms.

• Promote suitability-based selling, simplified products, and stricter oversight of intermediaries.

Promoting Low-cost Passive Investments

• Encourage index funds and ETFs through lower costs and awareness campaigns such as “Mutual Fund Sahi Hai”.

• This can improve risk-adjusted returns for small investors.

Enhancing Financial Literacy and Trust

• Expand financial education under the National Strategy for Financial Education (NSFE).

• Focus on women, rural investors, and first-time participants.

Deepening Corporate Governance Reforms

• Strengthen enforcement of the Companies Act, 2013 and SEBI LODR norms.

• Ensure transparency, accountability, and effective role of independent directors.

Adopting Data-driven Inclusion Policies

• Use data from RBI, SEBI, and NPCI.

• Align policies with JAM trinity and Digital India to identify access gaps and promote inclusive participation.

Conclusion

The growing dominance of domestic household savings has improved the stability and resilience of India’s capital markets. However, without financial inclusion, investor literacy, strong governance, and effective regulation, this stability may not be sustainable. Addressing these challenges is essential to ensure equitable growth and long-term trust in India’s capital markets on the path to Viksit Bharat 2047.