Recent retail investor statistics inform several aspects of the rising India story. This sets the stage to make Indian markets a home for global households.
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Three numbers tell us how Indian investors are becoming a political constituency and India a geofinancial opportunity. They also make a virtuous cycle as to why the Indian stock markets need to be seen as serving India’s grand strategy by leveraging it to benefit the world which in turn powers the India story.
First, the number of investors. According to the National Stock Exchange (NSE), there are more than 100 million registered and unique investors in the Indian stock markets—that’s close to the entire population of Vietnam. With 70 percent of Indians (about 980 million individuals) over the age of 18, one in 10 citizens (10.2 percent of all adults) are investors—that is less than Japan’s or Germany’s which is 15 percent each; the United Kingdom’s (UK) 23 percent and, the United States’ (US) 62 percent. As prosperity rises with a growing economy, the number of investors in India will grow faster.
According to the National Stock Exchange (NSE), there are more than 100 million registered and unique investors in the Indian stock markets—that’s close to the entire population of Vietnam.
Second, the rise in scale. At close to US$5.5 trillion, the market capitalisation of companies listed on the BSE is the world’s fourth largest, after the US’s $50 trillion, China’s $10 trillion, and Japan’s $6 trillion. There are more than 5,300 companies listed on the Bombay Stock Exchange (BSE) and more than 2,300 companies on the NSE. The fact that international financial trackers do not have Indian markets on their home pages seems to be more an act of ideological commission than an innocent omission.
And third, the ease of route for households to be able to partake in the rising India story. Small Indian investors through systematic investment plans (SIP) are, apart from building wealth for themselves, creating a virtuous cycle of turning household savings into investments. Over the past seven years, India’s SIP book has jumped to INR 200,000 crore, rising at a rate of 24 percent per annum and beating the Sensex growth by almost 10 percentage points per annum.
Investor expectations from participating in India’s equity markets are taking the markets to new highs. SIPs, and not FPIs (foreign portfolio investors), have become the key drivers of Indian markets. As a result, valuations have run ahead of earnings—at a price-to-earnings multiple of 23.6, the Sensex is on the higher side of its historic valuations. A growing economy could be one reason, SIPs another. Together, they are compounding returns.
In the past quarter century, the BSE Sensex has risen at a rate of 11.9 percent per annum, and the NSE Nifty by 12.1 percent per annum. An investment of INR 1 lakh in the Sensex and the Nifty in 1999 is worth INR 16.6 lakh and INR 17.4 lakh respectively. Both have beaten fixed and ‘safe’ returns by huge margins.
In fact, for the Reserve Bank of India (RBI) to whine about this and try to pull households back to low-return fixed deposits, despite the rot in bank branches, is out of sync with the changed investor behaviour. Over the past two decades, fixed deposit rates have fallen from 10.0-10.5 percent in 1999 to 5.05-5.35 in 2020-21; today, they are hovering around 7-7.25 percent. The shift to riskier investments hows that investors are willing to take the risk of loss to offset the risk of inflation, currently at 3.5 percent, but it has seen terrible times earlier—11.9 percent in 2010, 13.23 in 1998 and 28.6 in 1974.
For the Reserve Bank of India (RBI) to whine about this and try to pull households back to low-return fixed deposits, despite the rot in bank branches, is out of sync with the changed investor behaviour.
Politically, the combined might of 100 million investors is the equivalent of 67 constituencies. These investors are scattered, with seven states—Maharashtra, Uttar Pradesh, Gujarat, Rajasthan, West Bengal, Karnataka, Madhya Pradesh and Tamil Nadu—accounting for almost two-thirds (64.6 percent) of investors. At some point, as prosperity rises, investors will become stronger constituents. Indian politics must be cognisant to and prepare for this change.
It takes time for investors to become confident about markets. The capital markets regulator Securities and Exchange Board of India (SEBI) became a statutory body 32 years ago, in 1992. Since then, the regulatory framework that began in the thick of scams of various sorts has sealed a new trust. Investors are now aware of market risk through the rise and fall in stock prices or indices. What their SIPs are telling us is that they are prepared to take the risk of loss in stride, given that the risk of scams has been controlled.
The 100 million investor mark has taken its time to mature. The first 10 million took 14 years, the next 10 million seven. It took a quarter century to reach 40 million investors in 2021. The median age of the 100 million investors is 32 years; 40 percent of them are less than 30 years old. Five years ago, the median age was 38 years.
This shows a ‘youthification’ of India’s markets. The last 10 million investors took to markets over the past five months, reflecting a rising momentum behind and expectations ahead—in the past five months, the Sensex has risen by 8 percent; it has jumped 36 percent over the past 12 months, and has more than doubled over the past four years.
The stock markets reveal the underlying base of companies. In the short term, they are unpredictable, however, in the long term, they reflect the economy. In turn, the economy is driven by companies, the best of which get listed. If they perform well as an aggregate, not only does it create jobs, opportunities, and wealth but also becomes a more inclusive platform for investors across the country and abroad. It is crucial, therefore, that stable and growing markets become one of the country’s key national goals and one economic pillar for India’s grand strategy.
If they perform well as an aggregate, not only does it create jobs, opportunities, and wealth but also becomes a more inclusive platform for investors across the country and abroad.
India’s stock markets and their underlying companies must be leveraged to create wealth not merely for Indian retail investors; they must become an aspirational destination for global retail investors. Partly, this is an ongoing story. The market capitalisation of Maruti Suzuki India is about US$45 billion, almost double that of its Japanese promoter Suzuki Motor Corp which trades at US$23 billion. The market value of Unilever Plc is US$152 billion, while its subsidiary Hindustan Unilever, at US$77 billion, trades at more than half the promoter’s value. Hyundai India’s forthcoming initial public offering (IPO) is likely to raise US$2.5 billion at a valuation of US$30 billion, which is three-fifths of the US$48 billion market capitalisation of its South Korean parent company, Hyundai Motor.
However, it’s not just business-to-business (B2B) relationships that the Indian markets must nurture. The policy environment must push for an easier framework to capture growth-seeking international savings. That is, the ability and pathways to attract investments of households in the US, the European Union, and Japan, through Indian funds into the markets. Given the high expected underlying nominal growth of 8.5 percent per annum or higher over the next two decades, Indian markets will outperform by fair margins—it is not difficult to imagine the Sensex at 200,000 by 2034.
The furious pace of Indian markets might be a slight overreaction of exuberance on the one side and the SIP money muscle on the other. Either way, it is not irrational—enough voices are talking about it being a bubble or froth. And for short-term traders that thrive on micro-changes in values of stocks and indices and live day to day, that might even be true. But for retail households, seeking long-term returns of five years and more, these are blips and par for the course.
In the middle of the worst fall in global markets in recent times, driven by COVID-related policy actions, the Sensex crashed by a third, from more than 41,000 to less than 28,000 in 29 trading days, only to rise by 50 percent back to above 41,000 in 149 trading days. Even A.B. Bardhan’s May 2004 comment “Sensex bhaad mein jaye” (Sensex be damned) that shaved off 894 points or 16.5 percent in two days—on fears that the new government would be anti-business, anti-market—couldn’t keep the index down for long. During the United Progressive Alliance (UPA) decade, the Sensex doubled by the end of its first term and had risen by more than five times by the end of UPA 2.
The policy environment must push for an easier framework to capture growth-seeking international savings.
Easing capital inflows and outflows, not merely for global companies but foreign households, will create their stakes in India. True, the risk of global exposure and its moodiness will rise. However, given the conservative stance of RBI and the strong regulatory oversight of SEBI, these can be handled. It is unlikely that India will implode as Indonesia, South Korea, and Thailand did in 1997.
On the economic side of grand strategy, the West has weaponised sanctions. India must do the opposite and offer the rise of Indian markets to the world and invite it to take a partake of the rising India story. Across the world, geographical diversification is a common thread for investors—an ETF around US tech or a Japan exposure, for instance. In that spirit, India can provide a growth kicker to flat portfolios.
The role of the GIFT City as an international financial centre has become crucial. It could create investment nomenclatures to enable this journey that’s just about beginning. At a time when the West seems to be boxing itself into deglobalisation, almost hurtling towards an “American Peronism”, India can become the returns destination for their economically squeezed households. In other words, India can create a financial “Vasudhaiva Kutumbakam: The world is one family”—of global investors.
Gautam Chikermane is Vice President at the Observer Research Foundation.
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Gautam Chikermane is Vice President at Observer Research Foundation, New Delhi. His areas of research are grand strategy, economics, and foreign policy. He speaks to ...
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