Transformation in India's Capital Markets
A significant transformation is occurring in India's capital markets, where domestic household savings are increasingly replacing foreign institutional investments. This change represents a shift in market power and reduces India's exposure to volatile global capital, contributing positively to market stability.
Current Trends and Data
- Foreign Portfolio Investor (FPI) ownership of Indian equities has declined to a 15-month low of 16.9% and 24.1% in the NIFTY 50.
- Domestic Mutual Funds (MFs) are reaching new highs, with Systematic Investment Plans (SIPs) recording significant inflows.
- Individual investors now own nearly 19% of the market, a peak not seen in over two decades.
Policy Implications
The Reserve Bank of India benefits from greater flexibility due to domestic inflows and low inflation rates, easing the focus on defending the rupee against capital flight. However, the stability gained is precarious and hinges on maintaining household confidence and resilience against market downturns.
Primary Market Growth
- This fiscal year, 71 mainboard listings have raised over ₹1 lakh crore.
- In the first nine months of FY25, investments announced by Indian companies exceeded ₹32 lakh crore, a 39% increase over the previous year, with private participation at around 70%.
Challenges in Retail Participation
The quality of financial advice and distribution of wealth remains a concern, as seen in the IPO market where companies like Lenskart, Mamaearth, and Nykaa command high price-to-earnings multiples. This raises questions about the risk exposure of retail investors.
Financial System Inefficiencies
- Most active fund managers struggle to outperform the market after accounting for risk and fees.
- The decline in household equity wealth by ₹2.6 lakh crore last quarter highlights potential issues with wealth distribution, particularly among new investors.
Steps for Improvement
Addressing these challenges involves enhancing investor protection, reducing fees, and promoting low-cost investment vehicles. Structural issues such as low promoter holdings and the need for stronger corporate governance also require attention.
Inclusivity and Financial Education
- Data-driven policies can help address access disparities, particularly for women and underrepresented groups.
- Ensuring that market growth translates to broader financial literacy and integrity is crucial for sustainable development.
The transformation in capital markets holds promise, but requires strategic management to ensure inclusive growth and financial stability.
