Quick Overview
India’s capital markets are undergoing a structural transition in which domestic household savings are increasingly replacing foreign portfolio investment (FPI) as the primary source of liquidity. This shift has enhanced market stability and reduced vulnerability to global shocks, but it has also raised concerns regarding investor protection, valuation risks, and unequal participation, especially in the context of India’s long-term development goal of Viksit Bharat 2047.
Introduction
Capital markets play a central role in mobilising savings, allocating capital efficiently, and supporting long-term economic growth. Traditionally, India’s equity markets were heavily influenced by foreign portfolio investors, making them sensitive to global liquidity cycles and external shocks. In recent years, however, rising household participation through mutual funds and direct equity investment has altered the ownership structure of Indian markets. This domestic-led transformation marks a significant shift in India’s financial architecture, offering both opportunities for macroeconomic stability and challenges related to inclusiveness, governance, and investor preparedness.
How Domestic Money Is Shaping Indian Capital Markets
Shift in Market Ownership and Control
Foreign portfolio investors’ ownership of Indian equities has declined to a 15-month low of about 16.9%, and to nearly 24.1% in the NIFTY 50. In contrast, domestic mutual funds have recorded sustained growth, supported by consistent Systematic Investment Plan (SIP) inflows. Retail investors, through direct equities and mutual funds, now own nearly 19% of the equity market, the highest share in over two decades. This transition has shifted market influence from globally mobile capital to domestic savers, reducing exposure to sudden external capital reversals.
Boom in Primary Markets and Capital Formation
The growing confidence of domestic investors is reflected in a strong primary market. In 2025, 71 mainboard IPOs collectively raised over ₹1 lakh crore. At the same time, corporate investment announcements rose by 39% year-on-year in FY25, with nearly 70% led by the private sector. This indicates improved domestic risk appetite and a stronger capacity for capital mobilisation within the economy.
Greater Market Stability
Domestic savings tend to be long-term and less reactive to global financial volatility. As a result, they act as a stabilising anchor during periods of external uncertainty. This was evident during the October 2025 market rally, when domestic inflows provided a buffer against global risk-off sentiment, supporting equity prices and reducing volatility.
Enhanced Policy Space for the RBI
Reduced dependence on FPI inflows provides the Reserve Bank of India with greater monetary policy autonomy. Lower sensitivity to capital flight allows the RBI more flexibility to manage interest rates, support bank credit growth, and balance inflation and growth objectives. However, this policy space remains conditional on sustained household confidence and could narrow sharply during a major market correction.
Key Challenges of a Domestic-led Capital Market Transition
Investor Readiness and Financial Literacy Gaps
A large number of first-time retail investors have entered equity markets with limited understanding of risk, valuation cycles, and long-term investing. During market downturns, such investors are particularly vulnerable to losses, which can undermine trust in capital markets.
Valuation Excesses
Several IPOs and new-age companies are being priced at valuations disconnected from underlying earnings and fundamentals. A reversal in market sentiment could trigger sharp corrections, disproportionately affecting small and retail investors.
Low Investor Returns
Despite their popularity, many actively managed mutual funds fail to outperform benchmark indices after accounting for fees and risk. Meanwhile, low-cost passive funds remain underutilised, limiting long-term returns for household investors.
Unequal Participation
Equity and mutual fund ownership remains concentrated among urban and higher-income households with better access to financial services. This uneven participation constrains the role of capital markets in promoting inclusive growth.
Corporate Governance Concerns
Declining promoter shareholding, while sometimes reflecting genuine capital raising, also raises concerns about long-term commitment and opportunistic exits. Stronger governance and transparency are essential to protect domestic savers who now anchor the markets.
Measures Needed to Strengthen India’s Capital Markets
Address Information Asymmetry: Strengthen SEBI’s investor protection framework by moving beyond disclosure-based regulation towards suitability-based selling and simplified financial products.
Promote Low-cost Passive Investing: Encourage index funds and ETFs through lower expense ratios and targeted investor awareness campaigns.
Enhance Financial Literacy: Scale up the National Strategy for Financial Education with special focus on women, first-time investors, and underrepresented groups.
Deepen Corporate Governance: Enforce stricter compliance with the Companies Act, 2013 and SEBI LODR norms to ensure transparency and accountability.
Adopt Data-driven Inclusion: Leverage JAM trinity and data from RBI, SEBI, and NPCI to identify access gaps and design targeted inclusion policies.
Conclusion
India’s shift towards domestic-led capital markets marks a significant milestone in reducing external vulnerabilities and strengthening financial sovereignty. While this transition has improved market stability and expanded policy space, its sustainability depends on inclusive participation, robust investor protection, and sound corporate governance. Without addressing these challenges, the apparent stability may prove fragile. Strengthening financial literacy, governance standards, and investor outcomes will be critical to ensuring that domestic capital markets support equitable and resilient growth on the path to Viksit Bharat 2047.
CLAT / Exam Relevance Summary
Prelims: Capital markets, FPI, mutual funds, IPOs, role of RBI
GS Paper 3: Financial deepening, role of capital markets in growth, macroeconomic stability
Mains: Impact of declining FPI dependence, challenges of rising retail participation, governance reforms
CLAT: Economic policy analysis, financial regulation, inclusive growth issues