Saving reshape India's market

https://www.google.com/amp/s/www.thehindu.com/business/Economy/savings-shift-reshapes-indias-markets/article70384285.ece/amp/

Copyright infringement not intended

Picture Courtesy: The Hindu

Context:

Domestic household savings are increasingly replacing Foreign Portfolio Investors (FPI) as the dominant force in Indian equity markets.

Current Status:

• FPI ownership has fallen to a 15-month low of 16.9% and 1% in NIFTY 50.
• Domestic Mutual Funds (MFs) and direct retail investors now own ~19% of the market — highest in over 20 years.
• With stronger domestic inflows and low inflation (CPI at 0.3% in October), RBI gains more room to support credit growth, manage growth–inflation trade-offs, and worry less about defending the rupee from capital flight.
• Corporate investment announcements crossed ₹32 lakh crore, up 39% Year on Year, with private sector participation at 70%.

What are the multidimensional implications of the shift toward domestic savings?

• Greater macroeconomic stability: Reduced reliance on volatile FPI flows lowers vulnerability to sudden capital flight. In October 2023, when FPIs sold over ₹28,000 crore, domestic SIP inflows of ₹16,928 crore/month cushioned market volatility.
• Improved policy autonomy: RBI gains flexibility as domestic inflows and low inflation reduce pressure on the rupee. Lesser dependence on FPI reduces interest-rate sensitivity to global liquidity swings, as seen during the 2022 Fed tightening cycle.
• Shift in market power: Domestic households and MFs increasingly determine market direction, reducing foreign dominance. Passive SIP flows support market even during global risk-off.
• Rising wealth inequality: Equity wealth concentrates among financially literate, urban, higher-income groups. Urban male investors dominate SIP accounts whereas women account for only 34% of new Mutual Fund portfolios.
• Strengthening domestic financial institutions: Mutual Fund become systemic stabilisers but also systemically important. Mis-selling of small-cap MFs in 2023–24, where products were advertised as low-risk despite high volatility.
• Lower consumption growth: Concentrated wealth lowers marginal propensity to consume, affecting demand.

What are the challenges associated with it?

• Overexposure of New Retail Investors: Millions of first-time investors are entering markets through SIPs, apps, and IPOs without adequate financial literacy.
• Bubble Formation Risk: Excess retail enthusiasm can inflate asset prices beyond fundamentals. Lenskart IPO at unusually high multiples. Earlier cases like Nykaa and Zomato, where post-listing corrections wiped out early retail gains.
• Wealth inequality may deepen: Equity participation remains concentrated in urban, high-income groups. Mutual Fund penetration is 3× higher in financially developed districts.
• Uneven Inclusion: Access to markets varies sharply by gender, geography, digital literacy, and income levels. Tier-2 and Tier-3 cities lag far behind metros in MF participation.
• Capital Raising Concerns: High demand enables companies to raise capital at inflated valuations. Mamaearth and Nykaa saw steep declines post-listing despite huge investor interest.

Government initiatives to strengthen domestic investor participation:

SEBI’s Regulatory Reforms for Investor Protection:

Mutual Fund Regulations

• Reduction in total expense ratios (TERs) to lower costs for retail investors.
• Risk-labelling (SEBI’s Riskometer) to help investors understand product risks clearly.
• Caps on commission structures to prevent mis-selling by distributors.

IPO and Listing Safeguards

• Tighter disclosure norms for start-ups and loss-making companies raising funds.
• Introduction of Anchor Investor lock-in to reduce volatility post-listing.
• Mandatory pre-filing of Initial Public Offering documents to improve transparency.

Small-cap & Mid-cap Safeguards (2024–25)

• SEBI directed AMFI/MFs to conduct stress tests, manage liquidity risk, and prevent overconcentration in high-risk pockets.

RBI Measures for Financial Stability:

Strengthened Market Surveillance

• Monitoring of large redemptions and liquidity conditions in MF debt schemes.
• Tighter norms on Non-Banking Financial Company–MF interactions to reduce systemic spillovers.

Deepening Financial Markets

• Reforms to promote corporate bond market liquidity, including market-making frameworks.

Government’s Financial Inclusion Initiatives:

 Jan Dhan–Aadhaar–Mobile (JAM) Trinity

• Ensures universal bank access, enabling households to invest digitally in MFs, equities, and ETFs.

Digital India & UPI

• Creates the backbone for easy, low-cost retail participation in formal finance.
• Retail investment platforms and SIP automation are enabled by UPI.

Conclusion:

India’s shift toward domestic-savings–driven markets marks an important step toward financial self-reliance and stability. However, without strong investor protection, financial literacy, balanced participation, and robust regulation, this shift risks deepening inequality and exposing new investors to heightened vulnerabilities. Ensuring transparency, low-cost investing, and inclusive access is essential for converting rising domestic savings into sustainable and equitable wealth creation.

Source: The Hindu