Domestic Capital Market Shift in India's capital market

Domestic Capital is taking over the Indian capital markets. Domestic savings are replacing foreign institutional money, boosting stability but exposing new investors to uneven participation and higher risks. Read here to learn more.

India’s capital markets are undergoing a quiet but consequential transformation. For decades, foreign portfolio investors (FPIs) acted as the marginal price-setters, injecting liquidity during global risk-on phases and pulling out abruptly during crises.

Today, that role is increasingly being assumed by domestic household savings, channelled through mutual funds, SIPs, pension funds, and direct retail participation.

This shift has undeniably strengthened India’s financial resilience. Yet it also raises deeper questions about investor protection, valuation discipline, and inclusive participation, issues that will shape whether domestic-led markets can truly support the ambition of Viksit Bharat 2047.

Table of Contents

Domestic Capital Market

FPI ownership of Indian equities has declined to about 9%, and to roughly 24% in the NIFTY 50, indicating reduced dominance of foreign capital.
Domestic mutual funds continue to hit record highs in assets under management, supported by consistent Systematic Investment Plan (SIP) inflows from households.
Retail investors now directly or indirectly own nearly 19% of the equity market, the highest share in over two decades.
This shift marks a transfer of market influence from globally mobile investors to domestic savers with longer investment horizons.
As a result, Indian equity markets have become less sensitive to external shocks such as global interest rate cycles or geopolitical disruptions.

Primary Markets

Domestic confidence is also reshaping capital formation.

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India’s primary markets have seen a surge in activity, with over 70 mainboard IPOs raising more than ₹1 lakh crore in FY25.
Unlike earlier cycles dominated by foreign demand, these issues are increasingly absorbed by domestic institutions and retail investors.
Corporate investment announcements have increased sharply, by nearly 39% year-over-year, with the private sector accounting for nearly 70% of new proposals.
This reflects not only improved balance sheets, but also the availability of domestic risk capital willing to back expansion in manufacturing, infrastructure, technology, and green energy.

In macroeconomic terms, this is a healthy evolution.

A country aspiring to become a global manufacturing and innovation hub cannot rely indefinitely on volatile foreign capital.
Domestic savings that anchor long-term investment reduce external vulnerability and align financial markets more closely with national development priorities.

Greater Policy Space for the RBI

The shift towards domestic liquidity has also expanded the policy autonomy of the Reserve Bank of India.

With reduced dependence on FPI inflows to finance the current account or stabilise markets, the RBI enjoys greater flexibility to balance growth and inflation objectives.

This autonomy allows:

Less frequent intervention to defend the rupee against capital flight
Greater freedom to calibrate interest rates to domestic conditions
Stronger support for bank credit growth and financial deepening

However, this policy space rests on a fragile foundation: household confidence.

If domestic investors experience sharp losses during a market correction, sentiment can reverse quickly, narrowing the very autonomy that domestic capital now provides.

Challenges in Domestic-led Markets

While the shift to household-driven markets enhances stability, it also exposes new vulnerabilities.

Investor Readiness and Financial Literacy

Millions of first-time investors have entered equity markets in recent years, many with a limited understanding of risk, cycles, and valuation. Social media-driven stock tips, speculative trading in small-cap stocks, and unrealistic return expectations have become common.
During a prolonged correction, these investors are likely to bear disproportionate losses, risking not just wealth erosion, but a loss of trust in capital markets that could set back financialisation by years.

Valuation Excesses and IPO Froth

Several recent IPOs, particularly in new-age sectors, have been priced at significant premiums to earnings and cash flows. While optimism about India’s growth story is justified, pricing growth too far ahead of fundamentals creates fragility.
If sentiment turns, valuation corrections will hurt retail investors most, those who entered at the top with limited buffers or diversification.

Low Net Returns for Small Investors

Despite their popularity, most active mutual funds fail to consistently outperform benchmark indices after fees. Yet passive products, index funds and ETFs, remain underutilised.
This means that even as households take more risk, their long-term returns may not adequately compensate them, undermining the wealth-creation promise of market participation.

Unequal Participation

Equity ownership remains heavily skewed toward urban, higher-income households with better access to financial products and advice. Rural households, informal workers, and many women remain underrepresented.
Without broader participation, capital market gains risk becoming socially concentrated, limiting their contribution to inclusive growth.

Corporate Governance Pressures

Declining promoter shareholding, while often a sign of market maturity, also raises concerns about long-term commitment and opportunistic exits.

As domestic savers increasingly anchor markets, the quality of governance, disclosure, and board oversight becomes central to protecting household wealth.

Way forward for the Domestic Capital market

To sustain this transformation, policy must move beyond celebrating domestic inflows to strengthening market architecture.

Investor Protection Beyond Disclosure

SEBI’s framework must evolve from information-heavy disclosure to suitability-based selling, simplified products for first-time investors, and tighter oversight of distributors and advisers.
Disclosure alone cannot protect investors who lack the capacity to interpret complex information.

Promoting Low-cost, Long-term Investing

Index funds and ETFs should be actively promoted through lower expense ratios and sustained awareness campaigns such as Mutual Fund Sahi Hai.
Improving net returns is essential to maintaining household confidence.

Deepening Financial Literacy

The National Strategy for Financial Education (NSFE) must scale up outreach, especially among women, small savers, and first-generation investors.
Financial inclusion without literacy risks becoming financial exposure.

Strengthening Corporate Governance

Stricter enforcement of the Companies Act, 2013 and SEBI’s LODR norms, greater accountability of independent directors, and improved disclosure standards are critical as domestic households replace foreign institutions as market anchors.

Data-driven Inclusion

Leveraging data from RBI, SEBI, NPCI, and the JAM framework can help identify participation gaps and design targeted interventions, ensuring that domestic capital markets do not remain an urban elite phenomenon.

Conclusion

India’s transition from FPI-driven markets to domestic-led capital formation is a historic milestone. It has reduced exposure to global volatility, strengthened policy autonomy, and revived private investment confidence. But stability alone is not development.

Without robust investor protection, fair returns, broad participation, and strong governance, domestic capital markets risk becoming fragile and exclusionary. As India moves toward Viksit Bharat 2047, the challenge is not just to mobilise household savings, but to ensure that markets convert those savings into sustainable, inclusive, and trustworthy wealth creation.

The future of India’s capital markets will be decided not by how much money flows in, but by who participates, who benefits, and how well the system protects those who now sustain it.

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