Syllabus: GS3/Economy
Context
- India’s Nifty50 and Sensex indices have slipped about 1%, underperforming nearly every major global benchmark, while markets in South Korea, Japan, China, and the US have surged in recent months, rising between 2% and 21%.
About the India’s Stock Market
- It operates under a robust and transparent regulatory framework overseen by the Securities and Exchange Board of India (SEBI). It comprises two major exchanges:
- Bombay Stock Exchange (BSE): Established in 1875, the BSE is Asia’s oldest stock exchange.
- It lists over 5,000 companies, with the Sensex serving as its benchmark index.
- National Stock Exchange (NSE): Founded in 1992, the NSE revolutionized trading through electronic systems and efficient settlement mechanisms.
- Its benchmark index, the Nifty 50, tracks the performance of 50 large-cap companies across key sectors.
- Bombay Stock Exchange (BSE): Established in 1875, the BSE is Asia’s oldest stock exchange.
- Together, these exchanges account for nearly all equity trading volume in India.
| Do You Know? – Stocks (aka shares or equities) represent ownership in a company. When one buys a stock, he/she is buying a small piece of that company. – Owning a stock means the buyer has three key rights i.e. ownership, profits (dividends), voting rights over the company. |
India’s Market Performance
- Record Capital Mobilisation: India is now the world’s leading market by number of IPOs and the third-largest by value, with 311 IPOs raising ₹1.7 trillion in just nine months of FY2025–26.
- The market capitalization-to-GDP ratio has surged from 69% in FY2016 to over 130%, reflecting deepening investor confidence and economic expansion.
- Expanding Investor Base: Investor participation in India’s capital markets has grown remarkably:
- Registered investors increased from 43 million in FY20 to 137 million today.
- Unique mutual fund investors now exceed 59 million, highlighting growing retail engagement in financial markets.
- Increased financial literacy, digital platforms, and systematic investment plans (SIPs) have democratized investing.
- As of 2026, India ranks among the top five global equity markets by market capitalization, with a valuation exceeding $4 trillion.
Concerns and Issues in India’s Stock Market
- Foreign Portfolio Investors (FPIs) Withdrawal: In the first 16 days of 2026, FPIs have already withdrawn $2.5 billion from Indian equities.
- In 2025, the total outflow reached nearly $19 billion, marking one of the largest foreign sell-offs in recent years.
- Valuation Premium and Earnings Mismatch: Indian equities have long commanded a valuation premium compared to peers in emerging markets such as Indonesia, Thailand, and South Korea.
- However, this premium is increasingly unjustified by earnings growth.
- Limited Exposure to the Global AI and Tech Boom: A major driver of recent global stock rallies has been the Artificial Intelligence (AI) revolution.
- Markets in South Korea, Japan, and the US have soared due to AI-led demand for chips, memory, and cloud infrastructure.
- India, however, falls into the ‘low AI exposure’ category, meaning few listed companies directly benefit from the global AI surge.
- Global Geopolitical and Trade Uncertainty: A delayed or unfavorable trade deal impacts export-oriented sectors and investor sentiment.
- Global funds are preferring more politically stable markets like Japan and South Korea.
- High Domestic Valuations and Retail-Driven Volatility:Domestic Institutional Investors (DIIs) and retail investors have stepped in to stabilize markets while foreign investors are selling.
- India’s retail participation through mutual funds and Systematic Investment Plans (SIPs) has grown significantly, providing a strong domestic base.
- Sectoral Imbalances and Concentration Risks: India’s market rally over the last few years has been narrowly led by select sectors, mainly banking, IT services, and energy.
Key Regulatory and Market Reforms
- Under SEBI’s leadership, several landmark reforms have modernized India’s capital markets:
- Reduced IPO listing timeline to T+3 days for faster access to capital.
- Simplified norms for rights issues and enhanced anchor investor participation.
- Online bond platforms to boost retail participation in the corporate bond market.
- Strengthened disclosure and transparency norms for listed companies.
- These measures aim to deepen the market, enhance liquidity, and improve investor protection.
| Securities and Exchange Board of India (SEBI) – It was constituted as a non-statutory body in 1988 through a resolution of the Government of India and was established as a statutory body under the provisions of the Securities and Exchange Board of India Act, 1992. Objectives – Investor Protection: Safeguarding the interests of investors in securities. – Market Development: Promoting the development of a robust and efficient securities market. – Market Regulation: Regulating the business of stock exchanges, intermediaries, and other market participants. |
Foreign Investment and Global Integration
- India’s equity markets have become a preferred destination for global investors, thanks to:
- Stable macroeconomic policies.
- Rapid digitization and fintech integration.
- A strong regulatory reputation under SEBI.
- India’s high GDP growth rate, which outpaces most major economies.
- Foreign Portfolio Investors (FPIs) have significantly increased exposure to Indian equities, particularly in technology, infrastructure, and financial services sectors.
Future Outlook
- With sustained economic growth, demographic advantages, and proactive regulation, India’s stock market is poised to become the world’s third-largest equity market by 2030. The focus will remain on:
- Expanding retail participation,
- Enhancing corporate transparency, and
- Strengthening digital market infrastructure.
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