Is small investors’ blind faith in the India growth story misplaced?

medium118882862The Indian stock market has had a difficult few months. The NSE Nifty 50 Index declined for 10 straight days recently — an unusually sustained dip. Policymakers in New Delhi tend to maintain a lordly indifference to turbulence in equities. But, on this occasion, they need to pay closer attention.America’s whipsawing tariff policies might have unsettled international markets. But the India sell-off has deeper and more disturbing roots. It is driven primarily by global funds heading for the door. They have taken out more than $15bn so far this year. The markets have lost $1.3tn in value since last September, and the Nifty 50 is down about 14%.The slide in the index would be far worse if not for the fact that domestic investors have been on the other side of this trade. They have been steadily buying what the foreigners sell — and that’s exactly why we should worry.India is in the middle of a share-buying revolution. In a single year, between 2023 and 2024, the number of retail brokerage accounts increased by a third. The National Stock Exchange said in January that new investor registrations are three times as many as before the pandemic. It now has 110mn unique investors — in a country that has about 320mn households.It’s these new investors’ savings that are on the other side of the trade. Domestic institutions are buying, of course, but so are retail investors through systematic investment plans (SIPs). That’s when people put a predetermined amount from their monthly income into stocks. In 2024, SIPs poured about $2.7bn a month into the markets. That rate accelerated after October, just as foreign investors began their stampede out of India.One way of looking at this is that regular citizens have their ears close to the ground, and therefore know something the “smart money” doesn’t. You often hear people praise the resilience of small investors, and tributes to their faith in the India growth story are common.Nice, if it’s true. But what if it isn’t? When one side of a trade has the entire world to invest in and the time and resources to analyse fundamentals, and the other side has faith and hope, who do you really think is getting the better of the deal? medium nocaptionhttp://youtu.be/M0vyuwXSuOQ?si=4DFfqaYZ0V-GZ7vBSome people are beginning to worry. The billionaire banker Uday Kotak asked recently: “Should we continue encouraging retail investors to keep buying? Retail investors in India are funnelling money into [Indian] equities daily... Money from individuals from Lucknow to Coimbatore is flowing to Boston and Tokyo.” The economy, he warned, was “over-financialised” for its level of development, with investors moving their savings into equities “without understanding valuations”.There are voices preaching caution even in perennially optimistic New Delhi. This year’s Economic Survey, the government’s flagship policy publication, argued that financial markets shouldn’t grow faster than the rest of the economy. In last year’s edition, officials warned that sustained losses would lead to investors feeling cheated, and refusing to return to the capital markets.India’s growth momentum is already weak. In a country so dependent on consumer demand, market downturns have a disproportionate wealth effect, weighing further on the economy. But the sense of betrayal that small investors would feel might arguably have an even worse effect; it would be a terrible outcome if they wind up sitting on their savings for a generation.Political leaders must immediately stop mythologising the retail investment revolution. It isn’t because of some numinous faith in India; people are buying stocks because apps and SIPs have made it much easier, and because they don’t have anywhere else to put their money. And what should leaders be doing to change this?An earlier generation might have bought a home; but real estate is now expensive, the bar to get into it high, and the returns low. Bank deposits, thanks to the inefficient banking sector, often give you negative real rates on your money. And, for the past year, regulators have banned funds that invest in markets outside the country from adding new subscribers. Indians have been locked into their stock market.Financial inclusion is great, and India’s drastic reduction of the transaction costs associated with saving and investment is a major achievement. Regulators have spent decades trying to get more people from small-town and rural areas into the market.But ordinary Indians should be given options. Whether through more comprehensive social security, or higher-return bank deposits, policymakers should give consumers a way to save that offers a share in growth, a hedge against inflation, and doesn’t expose them to risks they don’t have the bandwidth to process. People who lose their savings also lose their trust in the system. That’s any politician’s worst nightmare, and leaders should worry it’s coming true.