Growth of Indian capital markets

JM Financials recently shared an interesting research report on NSE, it had some interesting insights on growth on Indian capital markets, sharing few highlights here.

Over the last decade, the market capitalisation of Indian companies has risen considerably with Cash equities / futures / options segment volume growing at 16%, 15% and 64% CAGR respectively.

Capital market penetration is expected to rise mainly due to the following factors:

  1. Strong GDP growth
  2. Financialization of savings
  3. Discount brokers to drive higher retail participation
  4. Increase market depth through regulatory push.

Indian capital market overview

Stable economic growth: India’s economy is growing rapidly and is expected to continue to grow at a healthy pace in the coming years.

Market capitalisation has grown faster than the economy: Thanks to financialization of savings, new tech enablers, and improved retail participation, India’s capital markets are growing even faster than the economy at a CAGR of 10.9% in from 2012 till date

Lower turnover velocity:

The turnover velocity is the ratio between the Electronic Order Book (EOB) turnover of domestic shares and their market capitalization. The value is annualized by multiplying the monthly average by 12

India’s turnover velocity is very low at ~50% compared to other markets, such as China (395%) and the US (148%) .

There are a few reasons for this, including:

  • A higher concentration of trading in large-cap stocks.
  • A significantly high promoter holding in companies.
  • Relatively lower retail participation.

Shift in savings to capital markets: As per RBI, annual gross financial savings by households increased by 8.9% CAGR over FY12-22. However, the penetration of capital markets is quite low leaving a room for significant growth in equity as an asset class.

  • Annual gross financial saving by household: 8.9% CAGR over FY12-22
  • Household savings as a percentage of total gross savings: ~65%+
  • Share of financial assets in total savings: lower than developed economies
  • Penetration of capital markets in India: abysmally low (only 8.2% of financial savings in equity)
  • Number of bank accounts: 19x the number of demat accounts (FY23)

Mutual funds equity AUM aided by strong inflows: The growth of Mutual funds has accelerated in recent years (post Covid) due to the growing popularity of SIPs, with AUM growing at a CAGR of 32.2% over the past 3 years.

EPFO’s investment in ETFs: Increased allocation to equities led to EPFO’s ETF AUM to INR 2.5tn (as of FY22)

Retail participation surges post Covid: Retail market participation witnessed a surge post Covid. This was driven mainly by ease of transactions offered by discount brokers, improved investor awareness, and changes in saving patterns.

Discount brokers played a major role in increasing retail participation in the capital markets.

  • The number of demat accounts in India has increased from 22 million in FY14 to 115 million in FY23.
  • The number of active retail investors has also increased from 4 million in FY14 to 33 million in FY23.

Retail participation:


Just curious, does it make sense comparing GDP and MCap growth rates? Wouldn’t it be better comparing MCap growth with nominal earnings growth?

Comparing the market cap growth to the GDP provides a broader picture of the market’s overall direction. On the other hand, comparing with the earnings growth gives us a granular picture. Both approaches have their pros and cons.

Obviously, no company will share a falling graph. If you want honest and unbiased research, the best approach is to conduct your own research and findings. Considering the abundance of data available online, it is now easier than ever. I’m not saying the data is wrong, but in statistics, there are a million ways to twig it to make it appear right.