As concerns mount over foreign investor selling, soaring SIP inflows and market liquidity, Capitalmind founder Deepak Shenoy believes the solution is not to restrict money flows but to expand investment opportunities. According to him, India needs more companies to list on stock exchanges, creating a larger free float and allowing growing domestic savings to be deployed across a wider set of businesses.
Shenoy argued that blaming SIPs for market distortions misses the larger issue. India’s pool of listed companies has not expanded fast enough to absorb the growing flow of domestic capital, resulting in liquidity concentrating in a limited number of stocks.
“Sure, it’s also fashionable to blame SIPs. But we need to list more companies so that our SIPs can go into more avenues – expand the amount of free float available. Whether it’s the Tata Sons, a Jio or an NSE, new listings will allow the market to absorb more capital,” Shenoy said.
He noted that some stocks witness outsized moves because of limited free float, allowing a relatively small amount of capital to influence prices. According to Shenoy, this dynamic can be exploited by investors and has contributed to instances where stock prices move more because of liquidity constraints than underlying business performance.
“Some stocks rise because of relative illiquidity of their free floats. This is often harnessed by a lot of equity investors and sometimes, big stories are made because companies or large investors are able to control the amount of stock actually available to trade,” he said.
Shenoy pointed to the Jane Street episode as an example of how even highly liquid stock derivatives can be influenced through movements in underlying stocks. He said relatively small sums of capital, around ₹5,000 crore in that case, were sufficient to impact underlying prices.
More Liquidity Could Mean Better Price Discovery
According to Shenoy, increasing free float and bringing more companies to market could improve price discovery and ensure that stock performance is driven more by earnings growth than liquidity flows. However, he cautioned that such a transition may not be painless.
“If our stock market gets more liquid, we will probably see less crazy growth on just the back of SIPs, more on earnings growth. And it’s possible that markets correct in the short term – any large IPO has, in the past, preceded corrections,” he said.
He cited examples such as Reliance Power, Reliance Petroleum and the wave of IPOs seen in 2021 and 2022, noting that some market corrections were linked to the redistribution of liquidity and the availability of more investment choices. He also observed that the US market is likely to witness large IPOs in the near future.
Economic Highlights
Beyond the stock market, Shenoy pushed back against concerns surrounding India’s external position. He argued that measuring reserves solely in terms of months of imports ignores exports and remittances. India recorded a Current Account Deficit of around $50 billion in FY25, which could rise to approximately $80 billion in FY26. For the first nine months from April to December, the deficit stood at around $30 billion.
With around $550 billion in foreign exchange reserves and another $100 billion in gold reserves, Shenoy said India effectively has years of coverage against its current account deficit. He added that much of the recent decline in reserves stemmed from foreign portfolio investor outflows and RBI intervention in the currency market.
“We have 7 years of net imports. It’s not 6 months. It’s not one year. Assuming all exports stop is stupid if you also assume that imports keep happening with zero exports,” he said.
Shenoy also argued that FPIs should be allowed to buy and sell freely and that attempts to discourage selling by forcing deeper market declines would be counterproductive. He called for broader reforms to FEMA and said the RBI’s role as the primary provider of liquidity in the dollar-rupee market should eventually change.
Despite near-term concerns, Shenoy remains optimistic about India’s long-term growth story. He noted that new businesses continue to emerge and that future entrepreneurs are likely to be funded by wealth created from today’s successful founders. His broader message was that investors should avoid excessive pessimism and focus on long-term opportunities rather than short-term market noise.
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