India’s capital markets are undergoing a quiet but consequential shift. Domestic household savings are steadily replacing foreign portfolio inflows as the backbone of equity markets. This is more than a numerical rebalancing — it marks a transfer of market power, with implications for stability, policymaking, and inclusive growth as India looks towards its “Viksit Bharat 2047” vision.
How domestic money became the market anchor
Recent data from the NSE Market Pulse captures the scale of change. Foreign Portfolio Investor (FPI) ownership in Indian equities has fallen to a 15-month low of 16.9%, and to 24.1% within the NIFTY 50. In contrast, domestic Mutual Funds are recording all-time highs in assets, driven by record Systematic Investment Plan inflows.
Individual investors, through direct equity holdings and mutual funds, now own close to 19% of the market — the highest share in over two decades. Domestic savers have effectively become the market’s stabilising force, cushioning volatility and offering a “flight-to-stability” option during periods of global uncertainty, as seen during the October rally in the NIFTY 50.
What this shift means for monetary policy
The rebalancing of market ownership has expanded policy space for the Reserve Bank of India. With reduced dependence on volatile FPI flows and inflation easing sharply — CPI inflation fell to 0.3% year-on-year in October — the RBI can focus more on stimulating credit growth and managing the growth-inflation trade-off rather than defending the rupee against sudden capital outflows.
However, this flexibility rests on sustained household confidence. A sharp correction that disproportionately affects new retail investors could quickly erode this buffer, constraining policy options once again.
Primary market boom and confidence in capital formation
The rise of domestic capital is also visible in the primary market. This fiscal year has already seen 71 mainboard IPOs raising over ₹1 lakh crore. Corporate investment announcements in the first nine months of FY25 crossed ₹32 lakh crore, a 39% jump over the previous year, with private sector participation accounting for nearly 70%.
These trends signal growing confidence in India’s growth prospects and capital formation capacity. Yet, headline numbers mask underlying risks linked to valuation excesses and investor preparedness.
Valuation exuberance and the “performance problem”
Several recent IPOs have been priced at elevated price-to-earnings multiples, raising concerns that enthusiasm may be outpacing fundamentals. High-profile consumer internet listings have reinforced fears that retail investors are being drawn into risky bets without adequate understanding.
Financial research highlights a deeper structural issue — the “performance problem.” After accounting for fees and risk, most active fund managers struggle to consistently outperform the market. In such an environment, increased participation does not automatically translate into better returns for new investors.
Unequal outcomes and risks to inclusive growth
The distributional impact of this transition is critical. Mutual fund participation remains concentrated in urban and higher-income regions with better financial access. As a result, equity wealth creation risks being skewed towards upper-income groups.
The recent ₹2.6 lakh crore decline in household equity wealth is concerning if losses are borne mainly by new and financially vulnerable investors. Such outcomes undermine the promise of inclusive growth and can dampen aggregate demand, as wealth concentration typically lowers the marginal propensity to consume.
While market corrections are normal, repeated losses among inexperienced investors can erode long-term trust in financial markets.
Addressing access and information asymmetries
Managing this transition requires shifting from a disclosure-centric framework to one focused on active investor protection. Reducing costs is a critical step. Despite their advantages, low-cost passive funds still account for a small share of the market, while actively managed schemes dominate.
Promoting indexing, lowering expense ratios, and strengthening financial education can help mitigate the performance problem for retail investors.
Governance, data, and the next phase of reforms
Structural safeguards are equally important. Promoter holdings in the NIFTY 50 have fallen to a 23-year low of about 40%. While this may reflect healthy capital raising, it also raises concerns about opportunistic exits. Stronger corporate governance and transparency are essential to protect long-term domestic savers.
Finally, data-driven policymaking — using gender- and region-specific insights — can help identify gaps in participation and outcomes, enabling targeted interventions to broaden financial inclusion.
What to note for Prelims?
- Declining FPI share and rising domestic MF and retail ownership in Indian equities.
- Role of SIPs in stabilising equity markets.
- Link between domestic capital flows and RBI’s monetary policy flexibility.
- Difference between active and passive investment strategies.
What to note for Mains?
- Evaluate how rising domestic savings alter market stability and policy autonomy.
- Discuss risks of valuation excesses and unequal wealth distribution in capital markets.
- Analyse the “performance problem” and its implications for retail investors.
- Suggest reforms to improve investor protection, governance, and financial inclusion.
