Savings shift reshapes India’s markets

A significant transformation is under way in India’s capital markets. Domestic household savings are now replacing foreign institutional money. This is not just a change in numbers — it is a shift in market power. Indian equities are less exposed to the unpredictable swings of global capital, which is positive for stability. However, there is a challenge: millions of new retail investors are stepping in, and not all of them are prepared for the complexities ahead. As India aims for “Viksit Bharat 2047,” the question is whether stability built on unequal participation and limited returns supports inclusive growth.

The rise of domestic money

The latest NSE Market Pulse report shows Foreign Portfolio Investor (FPI) ownership of Indian equities at a 15-month low of 16.9% and 24.1% in the NIFTY 50. Meanwhile, domestic Mutual Funds (MFs) are hitting new highs quarter after quarter. Systematic Investment Plans (SIPs) are bringing in record inflows, and individual investors, through direct holdings and MFs, now own nearly 19% of the market, the highest in over two decades. Domestic savers are now the market’s anchor. They are helping reduce volatility and giving institutions a “flight-to-stability” option, as seen in the NIFTY 50’s surge in October.

This market ownership shift has a corresponding impact on the policy landscape. The Reserve Bank of India now enjoys greater flexibility, thanks to domestic inflows and record-low inflation — CPI inflation eased to 0.3% year-on-year in October. With less reliance on FPI flows, the central bank can prioritise stimulating bank credit growth and managing the growth-inflation trade-off, rather than defending the rupee from capital flight. Yet, this policy space is not guaranteed; it could quickly evaporate if household confidence falters or if market downturns disproportionately impact the most vulnerable. Without careful management, this shift risks becoming a source of future instability.

Boom in primary markets

Further reflecting the confidence in domestic capital, the primary market is booming. Seventy-one mainboard listings this fiscal year have raised over ₹1 lakh crore. This surge is supported by a strong appetite for capital formation: in the first nine months of FY25, Indian companies announced investments exceeding ₹32 lakh crore, a 39% increase over the same period last year. Notably, the share of private participation in these announcements has risen to around 70%.

However, beneath this growth lies a more complex reality. The celebratory narrative around MFs and retail participation often skips a key point: the quality of financial advice and how wealth is distributed. A concerning trend can be observed in the IPO market. Companies like Lenskart are commanding sky-high price-to-earnings multiples. Mamaearth and Nykaa have seen similar trends. These examples raise questions about whether market exuberance is outpacing fundamentals and whether retail investors are being exposed to excessive risk.

Financial literature provides some answers — investing doesn’t guarantee better returns. This dynamic is highlighted in the so-called “performance problem” in finance, where most active fund managers struggle to consistently beat the market after accounting for risk and fees.

Unequal outcomes

The consequences of this structural inefficiency are direct, impacting how wealth is distributed across society. When new equity wealth is concentrated among upper-income groups — as seen in higher MF participation in areas with formal financial access — market stability may inadvertently accelerate wealth inequality. The recent decline in household equity wealth by ₹2.6 lakh crore in the last quarter is particularly concerning. If these losses are concentrated among new, vulnerable investors, the promise of inclusive growth rings hollow. Moreover, concentrated benefits dampen aggregate demand, as high wealth concentration often leads to a lower marginal propensity to consume.

One can argue that increased retail participation is a sign of democratisation and will naturally lead to better outcomes as markets mature. But without appropriate safeguards and education, new investors may face higher risks and losses. Market corrections are a normal part of investing, but when losses are concentrated among inexperienced investors, long-term trust in markets can be damaged.

Fixing asymmetry

Addressing these challenges requires more than just increasing the volume of savings. The current financial system must confront the “access asymmetry problem.” This means shifting the focus from simply disclosing information to actively protecting everyday investors. Key steps include incentivising lower fees and promoting passive, low-cost investment vehicles.

With active schemes holding 9% of the market and low-cost passive funds only 1%, lowering expense ratios and educating investors on indexing are crucial steps toward solving the “performance problem.”

Deeper structural issues also demand attention. As promoter holdings in the NIFTY 50 reach a 23-year low of 40%, it is vital to ensure this reflects healthy capital raising, not opportunistic disinvestment. Strengthening corporate governance and transparency is necessary to safeguard long-term value for domestic savers.

Equally important are data-driven interventions. Using gender- and location-specific data can help identify gaps in access and outcomes, enabling targeted policies that bring more women and underrepresented investors into the financial mainstream.

The market’s new foundation is promising, but the imperative now is to shift from simply attracting funds to proactively deepening institutional integrity and broadening financial literacy. Navigating the asymmetries inherent in financial deepening is no longer a peripheral concern; it is a fiduciary imperative.

Saumitra Bhaduri is a Professor, Madras School of Economics, Chennai; Shubham Anand is a PhD Scholar