Stock market danger: The myth of buoyancy has turned it into a hamster wheel
The Indian stock market’s buoyancy is a myth with multiple holes. Not only could it be masking a deeper crisis in household savings, but the government may also have a pressing reason to keep capital markets in perpetual motion.
A recent research report from a prominent Mumbai brokerage house has shocked Indian capital markets by lifting the veil over the Indian stock market’s non-performance. But in doing so, the report also inadvertently focuses the arc-lights on two other consequential issues: the crisis in India’s savings economy and a need to understand the government’s pressing need to perpetuate the myth of a buoyant stock market.
This controversial note—titled 1-year, $90 bn and 0% Return Later from Kotak Securities—deflates much of the recent hype over stock market buoyancy by pointing to low corporate earnings growth and near-zero investment returns over the past 12 months.
The report points out that assertions about the stock market’s weak performance have been made to appear counter-intuitive, or even flimsy, when viewed against some of the dominant narratives built around stock indices: such as a rising swell of retail investments into equity markets, periodic bullish statements about certain sectors or certain investment themes, or even the benign fiscal and monetary support provided to capital markets through tax and interest rate cuts.
But the claims of poor performance begin to look real when viewed through the lens of middling earnings amid sky-high valuations.
Specifically, a lot of hyperbole and explanations have been riding on the surge of retail investments in equity markets, primarily through the vehicle of equity mutual funds. These inflows have been showcased as an indicator of market buoyancy, rather than the symptom of a malaise elsewhere. It also disregards fundamentals that have been dragging down both corporate and market performance.
The spurt of retail savings flowing into equity markets also points to the shifting structure of the household sector’s financial savings. Net financial savings (NFS) of the household sector plummeted to a low of 5.2% of gross domestic product (GDP) in 2023-24, compared with 7.4% in 2016-17.
While gross financial savings have grown during the same period—from 10.5%to 11.4%—it was a sharp increase in household liabilities (mostly mounting debt incurred) that dragged down NFS to its lowest level in many years.
One reason for the drop in household savings is income growth lagging consumption growth, leading to both a drop in savings and a rise in debt.
Apart from the perils presented by a falling NFS and sharply rising household debt, the structural shift indicated by disaggregated financial savings data also holds out an imminent risk. An August 2025 note from broking firm CLSA Securities shows that the share of deposits in household financial assets declined from 49.7% in 2011-12 to 38.3% in 2023-24. During this period, the share of household investment in equity and investment funds jumped from 12.8% to 26.8%.
This seems to indicate that low deposit rates could be compelling household savings to move towards equity. A recent article in the Reserve Bank of India’s (RBI) August bulletin, for example, concludes that fixed deposit interest rates—in addition to the state of financial inclusion and business confidence—play a significant role in driving flows to equity mutual funds.
Deposit rates have felt the first-round effect of the 100-basis-point drop in benchmark rates: State Bank of India offers 6.25% for a 1-year deposit which, after adjusting for taxes and inflation, leaves a minuscule yield on the table. Small wonder then that the year-on-year deposit growth for commercial banks on 8 August 2025 came in at a modest 10.1%.
In short, low deposit rates seem to be pushing households towards a riskier asset profile despite slower income growth and a reduced capacity to save. Any adverse event or contagion in markets could potentially spell disaster for household finances. RBI, though, seems unconcerned at the moment.
At its post-monetary policy press conference in August, when asked about household savings moving to riskier assets, RBI Governor Sanjay Malhotra acknowledged: “There is certainly a shift from banking to equity [and] from debt to equity. I think that is on the whole a healthy trend for any economy. As it grows, there should be a good mix and I think we are moving towards that. We should not be unduly concerned about that."
In contrast, RBI deputy governor M. Rajeshwar Rao had in January expressed concern about inherent risks in the banking system’s liability management moving from retail deposits to wholesale funding.
So, here is the conundrum: why are households in India increasingly shifting their savings to equity mutual funds despite depressed income growth and the broad market staying flat for the past 12 months? It might seem that the dominant narrative spun about market buoyancy may have to shoulder some responsibility.
There has been some alternative noise building up about how the share of tax revenues and cesses from capital markets—specifically from the securities transaction tax (STT) as well as taxes on capital gains and dividends received—has been increasing in the government’s budget. For example, the 2025-26 Union budget projects a 131% growth in STT collections over the actual receipts in 2023-24.
The underlying implication is that with revenue generation at stake, a need might have arisen to keep the stock market’s hamster-wheel in perpetual motion. That presents a completely different risk proposition.
The author is a senior journalist and author of ‘Slip, Stitch and Stumble: The Untold Story of India’s Financial Sector Reforms’ @rajrishisinghal
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