Savings Shift Reshapes India’s Markets

Syllabus: GS3/Economy

Context

• Domestic household savings are replacing Foreign Portfolio Investors (FPIs) as the dominant market force in India.

About

• The latest NSE (National Stock Exchange) 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 Household Savings

• Household saving is the difference between a household’s net disposable income and its total consumption expenditure, including taxes and debt repayments. 
• Household savings form the largest component of total domestic savings in India around 55–60%.
• Composition of Household Savings:
  • Financial Savings: Bank deposits, Insurance and pension funds, Mutual funds and equities, Small savings schemes (PPF, NSC, Sukanya Samriddhi, Post Office schemes).
  • Physical Savings: Real estate (houses, land), Gold and jewellery and Durables.
• They are a key source of capital formation, financing investment and supporting long-term economic growth.
  • Domestic household savings provides a stable alternative to volatile foreign capital flows.
• Recent Trends: 
  • Shift from physical to financial savings, especially among younger households.
  • Rise in retail participation in stock markets through SIPs, mutual funds, demat accounts.

Key Drivers of Financialisation of Household Savings

• Structural Drivers: Formalisation of economy GST, demonetisation gave push to the banking system.
  • Digital public infrastructure such as the UPI, Aadhaar, e-KYC has enabled easy access to financial products.
• Changing Consumption and Investment Patterns: Post-Covid consumption revival led to increased borrowing for consumption, housing, and education.
  • Households are now turning to higher-risk assets like equities and mutual funds. SIP contributions increased 8.5 times from ₹3,122 crore (2016) to ₹26,632 crore (2025).
• Market & Policy Drivers: Low returns from gold/real estate compared to equities & mutual funds.
  • Rise of SIPs as a stable monthly investment tool.
  • Regulatory reforms by regulatory bodies like SEBI, RBI, IRDAI, PFRDA boosting trust.
  • Tax incentives under Section 80C, NPS, and small savings schemes encourage households to invest.
• Behavioural Drivers: Younger investors are having a higher risk appetite.
  • Increased financial awareness via digital content, fintech apps.

Impacts on the Economy

• Positive Impacts:
  • Stabilises capital markets by reducing dependence on foreign portfolio flows.
  • Enhances capital formation for long-term growth (infrastructure, SMEs).
  • Deepens financial markets leading to better resource allocation.
  • Improves risk diversification and potential returns for households.
• Macro Benefits: 
  • Supports India’s transition to a $5 trillion economy.
  • Aligns with Viksit Bharat 2047 by broadening domestic investment base.
  • 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. 

Concerns with Financialisation of Household Savings

• Increased Exposure to Market Volatility: Shift towards equities, mutual funds and market-linked instruments exposes households to greater risk.
• Low Financial Literacy: Many new retail investors do not fully understand risk-return trade-offs, asset allocation, or long-term investment principles.
  • It can lead to herd behaviour, excessive trading, and susceptibility to mis-selling by intermediaries.
• Short-Term Speculative Investing: Rise of online trading platforms and social media–driven tips encourages speculative, high-risk trading, not productive long-term savings.
• Decline in Cushion of Physical Assets: Physical assets like gold and property have traditionally provided inflation hedging and stability. Rapid shift to financial assets may reduce household ability to withstand shocks if markets underperform.
• Limited Social Security Net: India has a large informal workforce with minimal pension coverage. Over-reliance on market-based savings without adequate safety nets can increase retirement insecurity.
• Regulatory Oversight Challenges: Rapid growth in new products crypto, derivatives, high-risk funds strains regulators SEBI, RBI. Mis-selling and high-fee structures in some products reduce net returns.
• Macroeconomic Concerns: Excessive household exposure to financial markets can transmit market stress into broader consumption shocks, affecting economic stability.

Way Forward

• Fiscal and Tax Reforms: Rationalise capital gains tax and savings-related tax structures. Offer tax breaks or guaranteed returns on small savings schemes like PPF and KVP.
• Expanding Financial Inclusion: Universalise the National Pension System (NPS) with auto-enrolment for informal workers. Promote customised micro-savings products for rural and informal sector households.
• Strengthen Regulatory Oversight: Ensure transparency in digital lending, mutual funds, and insurance schemes. Tighten unsecured lending norms to curb procyclical credit growth.
• Technology Innovations: Leverage fintech platforms for micro-savings, AI-based financial advice, and blockchain for secure savings instruments.
• Institutional Coordination: Develop a National Strategy on Household Savings with measurable targets.

Source: TH