Mutual Fund SIPs: Stopping Investment Could Have Far-Reaching Consequences for India's Economy

India's Booming SIP Culture: A Debate on Foreign Investor Exits and the Weakening Rupee

The debate surrounding India's booming SIP culture, foreign investor exits, and the weakening rupee has sparked strong reactions across Dalal Street, with many questioning whether rising domestic equity inflows are indirectly enabling foreign institutional investors (FIIs) to cash out of Indian markets.

Market veteran Deepak Shenoy, CEO of Capitalmind Mutual Fund, has pushed back sharply against the criticism of SIPs and domestic retail participation, arguing that deeper local ownership of Indian equities is ultimately positive for the economy. According to Shenoy, asking Indian investors to stop SIPs in order to discourage foreign selling would be counterproductive because liquidity itself is what makes markets attractive to global investors.

Shenoy highlighted a broader structural issue in Indian markets – foreign investors historically owning a disproportionately large share of non-promoter holdings in listed Indian companies. He argued that if domestic investors were discouraged from investing in equities, they would likely move money into overseas assets, gold, excessive consumption, or low-yield bank deposits – none of which would necessarily help India's economy or the rupee.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

A recent Jefferies report argued that the sharp fall in the rupee over the last two years was not primarily because of India's current account deficit, but because of weak capital inflows as foreign investors steadily pulled money out of Indian equities. The report estimated that equity market-driven outflows totalled nearly $78 billion over the past two years, even as Indian markets remained remarkably resilient because domestic investors kept buying relentlessly through SIPs, EPFO, NPS, and other institutional channels.

Shenoy's most powerful point, however, was not about liquidity, but about ownership. For decades, foreign investors owned a significant portion of non-promoter holdings in Indian companies. This meant that when Indian consumers spent money and Indian companies generated profits, a substantial share of those gains ultimately accrued to overseas investors. Now, for perhaps the first time at scale, Indian households are beginning to claim a bigger slice of that wealth creation.

The rise of domestic investing is not merely about mutual fund inflows or monthly SIP data. It is about Indian savers transitioning from passive consumers to owners of the economy itself. Shenoy challenged another deeply entrenched market phenomenon – the "illiquidity premium" – where several Indian stocks, especially multinational companies with low floating stock, historically traded at unusually expensive valuations because very few shares were available for trading.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

As domestic participation deepens, Shenoy believes such distortions will gradually disappear. Markets that were once narrow and institutionally controlled are becoming broader, deeper, and increasingly retail-driven. This is financial democratization playing out in real time.

Shenoy's argument is that focusing only on short-term currency pressure misses the much larger structural transformation underway: India is slowly becoming a market where Indians themselves own more of India's future.