The Indian stock market, one of the oldest in Asia, has a rich history that dates back to the 19th century. The evolution of the stock market in India is intertwined with the country’s colonial past and its eventual journey to independence in 1947.
The roots of the Indian stock market can be traced back to the early 19th century when the country was under British colonial rule. The growth of the stock market in India was closely linked to the development of trade, commerce, and industry under British influence.
The beginning of organized stock trading in India can be traced to the 1830s in Mumbai, which was rapidly emerging as a major commercial hub due to its strategic location and the presence of the British East India Company. The need for capital to fund large-scale infrastructure projects, such as the construction of railways and the establishment of textile mills, led to the introduction of joint-stock companies. These companies needed to raise capital from the public, leading to the early forms of stock trading.
The first recorded instance of organized trading in shares can be dated to the 1850s. A group of brokers began trading under a banyan tree in front of the Town Hall in Bombay. This informal group of brokers would later become the foundation of India’s first stock exchange.Agra Investment
The year 1875 marked a significant milestone in the history of the Indian stock market with the establishment of the Native Share and Stock Brokers’ Association, which later became the Bombay Stock Exchange. The BSE is the oldest stock exchange in Asia and was formed by a group of 22 brokers who would meet under the banyan tree to trade shares. The BSE played a crucial role in the development of the Indian capital markets by providing a platform for the trading of securities and formalizing the process of stock trading.
By the late 19th century, the Indian stock market had begun to grow rapidly, driven by the expansion of the railways, the establishment of cotton mills, and the booming trade in opium and textiles. The period saw the emergence of other stock exchanges in major cities such as Ahmedabad and Calcutta (now Kolkata), further strengthening the market infrastructure.
World War I (1914-1918) had a considerable impact on the Indian economy and the stock market. The war led to increased government spending and the need for war bonds, which were traded on the stock exchanges. However, the post-war period brought economic difficulties, including inflation and a decline in trade, which affected the stock market.
The 1920s witnessed a boom in the Indian stock market, driven by the global economic prosperity of the Roaring Twenties. However, this period was also characterized by speculation and the formation of stock market bubbles. The crash of the Bombay stock market in 1929, coinciding with the Wall Street Crash in the United States, led to a severe downturn in the Indian economy and stock market.
The Great Depression of the 1930s had a profound impact on the Indian economy and the stock market. The global economic slowdown led to a decline in demand for Indian goods, a fall in prices, and a contraction in economic activity. The stock market experienced a prolonged period of downturn during this time.
However, the Indian economy and the stock market began to recover in the late 1930s, aided by the growth of industries such as textiles, jute, and tea. The onset of World War II in 1939 brought new challenges, but also opportunities, as the demand for war-related goods and services increased.
World War II (1939-1945) had a mixed impact on the Indian stock market. On one hand, the war led to increased government spending and the issuance of war bonds, which were traded on the stock exchanges. On the other hand, the war caused disruptions in trade and production, leading to economic challenges.
1940s also saw the rise of new industries in India, including steel, cement, and chemicals, which contributed to the growth of the stock market. The industrialization of India, supported by the British government and Indian entrepreneurs, led to the emergence of new companies and the listing of their shares on the stock exchanges.
During the 1940s, Indian industrialists and economists began to advocate for economic nationalism and self-reliance. The Bombay Plan, formulated in 1944 by a group of leading industrialists, outlined a vision for India’s post-independence economy, emphasizing the need for industrialization and government intervention in the economy. This plan had a significant impact on the stock market, as it highlighted the importance of capital markets in financing industrial growth.
India passed the Securities Contracts Regulation Act in 1956, which formalized stock trading. This act provided a legal framework for the regulation of stock exchanges, securities contracts, and the protection of investors, further strengthening the foundation of the Indian stock market.
The newly-created Unit Trust of India (UTI) launched India’s first mutual fund scheme, the US 64, in 1964. The scheme became highly popular, raising Rs 6,400 crore by 1988, and established UTI as a major player in the Indian financial market.
Dhirubhai Ambani’s Reliance Industries, with interests in textiles and petrochemicals, listed on the stock exchange in 1977. The IPO garnered huge interest from retail investors, kickstarting the ‘cult of equity’ in India, and marked the beginning of a new era for Indian entrepreneurship and the stock market.
On January 1, 1986, BSE introduced the SENSEX, a 30-share index that became the benchmark for the Indian stock market. With a base year of 1978-79 and a base value of 100, the SENSEX provided a barometer of market performance and became the most widely tracked index in India.
The late 1980s were marked by a lack of transparency and undependable clearing and settlement systems, which underscored the need for a financial market regulator. As a result, the Securities and Exchange Board of India (SEBI) was established in 1988. However, it was not until 1992 that SEBI was granted statutory power, enabling it to regulate the securities market effectively.
In 1992, the National Stock Exchange of India Limited (NSE) was established. This period also saw a sharp spike in interest in the stock market, driven by a bull market led by Harshad Mehta. The NSE was created to bring greater transparency and efficiency to the market, and it introduced a modern, fully automated screen-based electronic trading system in 1994, which revolutionized trading in India.
On April 22, 1994, the NSE launched the Nifty 50 index, a benchmark Indian stock market index representing the weighted average of 50 of the largest Indian companies listed on the NSE. Initially, the Nifty 50 was calculated based on the full market capitalization methodology, but from June 26, 2009, the computation shifted to a free-float methodology. The base period for the Nifty 50 index is November 3, 1995, with a base value set at 1,000.
The 1991 economic liberalization marked a watershed moment in India’s economic history. Faced with a severe balance of payments crisis, the Indian government, under Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, initiated sweeping economic reforms. These reforms included de-licensing industries, reducing tariffs, and opening the economy to foreign investment.
Impact on theShareMarket:
The liberalization opened the Indian stock market to foreign institutional investors (FIIs) for the first time, bringing in substantial foreign capital.
It led to a rapid increase in market capitalization and liquidity, making the Indian stock market more attractive to global investors.
The reforms laid the foundation for a more modern, competitive, and transparent financial system, propelling the Indian stock market towards globalization.
The Securities and Exchange Board of India (SEBI) was established in 1988 to protect investor interests and promote the development and regulation of the securities market. However, SEBI was not granted statutory powers until 1992, following the Harshad Mehta scam, which highlighted the need for a stronger regulatory framework.
Impact on theShareMarket:
SEBI’s empowerment marked the beginning of a new era of regulatory oversight in the Indian stock market, enhancing investor confidence.
The introduction of rules regarding insider trading, disclosure norms, and market transparency helped curb malpractices and boosted the integrity of the market.
SEBI’s role in ensuring fair trading practices and protecting retail investors has been pivotal in the market’s evolution.
The 1992 stock market scam, orchestrated by stockbroker Harshad Mehta, exposed significant loopholes in the Indian banking system and stock market. Mehta manipulated stock prices using money obtained fraudulently from banks.
Impact on theShareMarket:
The scam led to a massive market crash, wiping out investor wealth and shaking confidence in the financial system.
It resulted in the restructuring of SEBI, granting it more powers to regulate the stock market effectively.
The scam underscored the importance of transparency and stringent regulation in the financial markets, leading to the modernization of trading systems and procedures.
The late 1990s saw a surge in technology stocks globally, including in India. The hype around internet-based companies led to inflated stock prices. However, when the bubble burst in 2000, stock markets around the world, including India, experienced significant downturns.
Impact on theShareMarket:
The burst of the dot-com bubble led to a steep decline in the value of tech stocks in India, causing a broader market correction.
It highlighted the risks of speculative investing and the importance of sound business fundamentals.
The market downturn pushed investors and regulators to focus on sustainable growth and proper valuation of companies.
The global financial crisis of 2008, triggered by the collapse of Lehman Brothers and the subprime mortgage crisis in the United States, sent shockwaves through global markets, including India.
Impact on theShareMarket:
The Indian stock market experienced one of its sharpest declines, with the SENSEX falling by more than 50% from its peak in January 2008.
The crisis led to increased volatility and highlighted the interconnectedness of global financial markets.
In response, Indian regulatory bodies, including SEBI and the Reserve Bank of India (RBI), strengthened risk management practices and regulatory frameworks, helping the market recover more robustly.
On November 8, 2016, the Indian government announced the demonetization of ₹500 and ₹1,000 currency notes in an effort to curb black money, counterfeiting, and tax evasion. This move had widespread implications across the economy, including the stock market.
Impact on the Share Market:
The stock market witnessed significant volatility in the immediate aftermath of the announcement, with sectors like real estate, banking, and consumer goods experiencing sharp declines.
Over time, the market stabilized as the transition to a less-cash economy began to show positive effects, such as increased digital transactions and better tax compliance.
The long-term impact was mixed, with certain sectors benefiting from increased formalization of the economy, while others struggled with the liquidity crunch.
The implementation of the Goods and Services Tax (GST) on July 1, 2017, was a landmark reform aimed at creating a unified indirect tax structure across India. It replaced a multitude of state and central taxes with a single tax regime.
Impact on theShareMarket:
The GST brought about greater ease of doing business and improved tax compliance, which was positively received by the markets.
Companies in sectors such as logistics, manufacturing, and consumer goods saw long-term benefits from the streamlined tax structure.
Despite initial challenges and market corrections, the overall sentiment remained positive as GST was expected to boost economic growth and corporate earnings.
The outbreak of COVID-19 in early 2020 led to unprecedented disruptions in global economies, including India. The pandemic-induced lockdowns and economic slowdown had a profound impact on the Indian stock market.
Impact on theShareMarket:
The stock market witnessed one of the steepest declines in history in March 2020, with the SENSEX dropping by nearly 40% from its pre-pandemic highs.
However, the market showed remarkable resilience, rebounding strongly by the end of 2020, driven by massive government stimulus, monetary easing by the RBI, and optimism around vaccine developments.
The pandemic accelerated the adoption of digital technologies in trading and investing, with a surge in retail participation in the stock market.
Here are the major regulatory improvements undertaken by SEBI for the stock markets in the last 10 years:
SEBI introduced regulations for REITs and InvITs, providing a framework for these investment vehicles and allowing investors to participate in real estate and infrastructure projects.
Implementation of the Securities and Exchange Board of India regulations standardized disclosure requirements and corporate governance norms for listed entities, enhancing transparency and protecting investor interests.
Introduction of the Goods and Services Tax (GST) was a government initiative, SEBI adjusted the regulatory framework to accommodate changes, ensuring smooth transitions for market participants.
Mandatory Dematerialization of Shares for Transfer (2018) was mandated by SEBI to transfer of shares of listed companies must be in dematerialized form, reducing fraud and simplifying the transfer process.
Framework for Commodity Derivatives Market (2015-2016) was merged by SEBI for Forward Markets Commission (FMC) with itself and brought the commodity derivatives market under its purview, introducing regulatory frameworks for these markets.
SEBI strengthened regulations on insider trading, defining insider trading more comprehensively and increasing penalties for violations to protect market integrity.
Introduction of Mutual Fund Reclassification Norms (2017): SEBI mandated the reclassification of mutual fund schemes to ensure clarity and reduce overlap, helping investors make more informed decisions.
Framework for Enhanced Monitoring and Reporting of Foreign Portfolio Investors (FPIs) (2018): SEBI introduced new norms for FPIs, including enhanced monitoring, to improve transparency and reduce the risk of market manipulation.
Introduction of the Regulatory Sandbox (2019): SEBI launched a regulatory sandbox to allow market participants to test new financial products and services in a controlled environment, promoting innovation while ensuring investor protection.
Implementation of Margin Requirements for Derivatives Trading (2020): SEBI tightened margin requirements for derivatives trading, aiming to reduce speculative trading and enhance market stability.
Enhanced Corporate Governance Norms for Listed Companies (2018): SEBI implemented stricter corporate governance norms, including rules on board composition, audit committees, and related party transactions, to enhance accountability and transparency.
Introduction of the Stewardship Code for Mutual Funds and Institutional Investors (2020): SEBI mandated that mutual funds and other institutional investors adopt a stewardship code, ensuring they actively engage with investee companies to protect investor interests.
Framework for Risk-Based Supervision of Market Intermediaries (2019): SEBI introduced a risk-based supervision framework for intermediaries like brokers and portfolio managers, focusing regulatory attention on areas with higher risk.
Regulations for Social Stock Exchange (2020): SEBI proposed a framework for a Social Stock Exchange to list social enterprises and voluntary organizations, allowing them to raise funds through the capital markets.
T+2 to T+1 Settlement: Indian exchanges shifted from a T+2 to T+1 settlement cycle starting January 2023, initiated in phases from January 2022.Kolkata Investment
Introduction of T+0 Settlement: A beta version of same-day (T+0) transaction settlement is being launched for select stocks on March 28, running concurrently with the T+1 system.
Full Implementation Goal: The market aims to fully adopt T+0 settlement within a year after completing the transition to T+1.
Cash Access Improvement: Under T+0, sellers will receive 100% of their cash on the day of the transaction, unlike the current T+1 system where 20% is delayed to the next day.
T+0 Settlement Phases: Phase 1 settles trades made by 1:30 pm by 4:30 pm; Phase 2 begins at 1:30 pm and runs until 3:30 pm, after which Phase 1 will be discontinued.
The Nifty 50 closing value shows a consistent upward trend over the years, reflecting the long-term growth of the Indian stock market. This growth is especially notable from the early 2000s onwards, where the index experiences significant increases, particularly around the periods leading up to and following economic reforms and technological advancements.
In contrast, the Nifty PE ratio displays more volatility, with noticeable spikes and drops at various points in time. These fluctuations suggest periods of market overvaluation or corrections. For instance, there are prominent peaks around 2008 and 2020, coinciding with global financial events like the financial crisis and the COVID-19 pandemic, respectively. Despite these fluctuations, the general trend shows that while the market has grown in value, it has also seen periods of significant revaluation, impacting investor sentiment and market stability. Overall, the Indian stock markets have shown a strong growth trajectory from 1990 while also emphasizing the accompanying market volatility. The data suggests that the market has been a good long-term investment.
BSE all listed companies market cap hits $5 trillion as of May 2024. This milestone places BSE among the elite global exchanges alongside those in the USA, China, Japan, and Hong Kong. The journey to this milestone showcases the rapid acceleration in India’s financial markets, with the first trillion dollars added over ten years from 2007 to 2017.
The subsequent growth was even more impressive, with $1 trillion added in under four years, another trillion in just 2.5 years, and the most recent trillion in a mere six monthsKanpur Wealth Management. This rapid growth underscores the increasing investor confidence and the robust performance of Indian companies.
Over the past year, the Indian stock market has witnessed a significant surge in the number of dematerialized (demat) accounts, reflecting the growing interest and participation of retail investors in the equity markets. As of June 2024, the total number of demat accounts reached a record high of 16.2 crore, with a remarkable net addition of 42 lakh accounts during the month. This growth in demat accounts has been fueled by several factors, including political stability following the recent Lok Sabha elections, strong portfolio inflows, and a robust economic outlook that has bolstered investor confidence. The equity benchmarks, Sensex and Nifty, have risen by over 4% in the last month, further driving investor interest and market participation.
The addition of new demat accounts in June 2024 saw a 23.5% increase compared to the average monthly additions in the current financial year, indicating a sharp rise in retail investor activity. This trend was particularly notable in the accounts registered with CDSL, which has been gaining market share consistently. In contrast, the NSDL saw a decline in its market share, losing 420 basis points year-on-year in total demat accounts and 620 basis points in incremental accounts. The increasing dominance of CDSL in the demat account segment underscores its growing importance in India’s financial ecosystem, as more investors turn to the stock market as a means of wealth creation.
The data shows a significant rise in new Demat accounts and SIP registrations, especially in the fiscal year 2024, signaling growing retail confidence in the Indian stock market. Despite the uptick in SIPs discontinued or tenure completed, the overall trend indicates robust investor engagement. This growth is indicative of the broader financial inclusion efforts and the increasing financial literacy among the Indian population.
The broader market activity also reflected this increased investor interest, with the overall average daily turnover (ADTO) in the stock market rising by approximately 15% month-on-month to ₹499 lakh crore. The futures and options (F&O) derivative segment, as well as cash ADTO, contributed significantly to this growth, with retail participation playing a crucial role. On the BSE, the total ADTO experienced a 92% year-on-year increase, driven by a 15% rise in F&O ADTO and a 37.5% increase in cash ADTO. However, despite these gains, there were some shifts in market share dynamics, particularly in the options segment, where BSE’s market share in the notional turnover segment declined slightly. In the brokerage sector, NSE saw a sequential increase in its active clients, with top discount brokers like Groww and Zerodha continuing to dominate the market, indicating a shift in investor preferences towards low-cost brokerage services.
Despite the uncertainties gripping international markets, India’s robust macro-economic stability is expected to provide a strong foundation for the country’s earnings outlook, offering a buffer against global headwinds.
India’s resilience amid global economic turbulence is anchored in its strong economic fundamentals. The nation’s solid public finances, stable external accounts, healthy banking system, and manageable corporate leverage collectively form a “fortress balance sheet.” This financial robustness underpins India’s macroeconomic stability and earnings durability, shielding it from the cascading effects of international market downturns.
A pivotal element contributing to India’s market stability is the reduced reliance on foreign institutional and portfolio investors. Historically, the Indian equities market was susceptible to volatility driven by foreign investment flows. However, a significant expansion of the domestic investor base, particularly with a surge in retail participation, has fostered a more resilient and stable investment environment.
In the face of global risk aversion, political uncertainties, and regulatory challenges, investors are advised to view any short-term market corrections as strategic entry points for long-term investment horizons, ideally spanning two to three years. Sectors such as Information Technology (IT) and Fast-Moving Consumer Goods (FMCG) are considered relatively insulated from market downturns, offering safer avenues for investment compared to more cyclical industries.
The Nifty50 index currently trades at about 21 times its price-to-earnings ratio, slightly above its long-term average of 19.9x. Despite this premium, the valuations are deemed attractive, supported by a notable 60 basis point reduction in the country’s risk premium over the past five years. Enhanced growth predictability, improved return ratios, and stronger cash flows across various sectors further justify the sustained high valuations.
Post-pandemic, India’s growth trajectory has shifted, buoyed by significant government investments in manufacturing and capital expenditure. Sectors like Industrials, Materials, and Consumer Durables are poised to maintain their strong performance. This trend is particularly favorable for small and mid-cap stocks, given their substantial representation in the manufacturing sector.
However, the magnitude of outperformance may moderate as current valuations already reflect much of this strengthChennai Investment. Additionally, a resurgence in mass consumption is anticipated to drive earnings growth in the FMCG sector and value retail. Investors should remain cognizant of potential sector rotations and inter-sector volatility, adapting their strategies accordingly.
As India continues to solidify its position as one of the fastest-growing major economies in the world, the outlook for the Indian stock market appears promising. The robust economic fundamentals, supported by consistent government initiatives, create a favorable environment for sustained market growth. The government’s focus on capital expenditure, with a substantial allocation of INR 11.11 lakh crore for FY25, is expected to fuel sectors such as capital goods, infrastructure, logistics, and ports. These areas are likely to benefit significantly from increased public and private investment, driving growth and profitability in the coming years.
Moreover, the ongoing transformation in the Indian economy, marked by the rapid adoption of new technologies and the expansion of key industries, presents compelling opportunities across various sectors. The rise of emerging markets such as electric vehicles, electronic manufacturing services (EMS), and green energy highlights India’s potential to lead in next-generation industries. Additionally, sectors like healthcare, tourism, and e-commerce are set to thrive as they capitalize on the growing consumer base and increasing digital penetration.
Looking ahead, the Indian stock market is poised to continue its upward trajectory, underpinned by a blend of strong macroeconomic performance, favorable demographics, and strategic investments in critical sectors. As the financialization of savings accelerates, driven by the rise in retail participation through SIPs and the growing number of demat accounts, the market is expected to attract more domestic and international capital. With the potential for further interest rate cuts, political stability, and policy continuity, India is likely to remain a preferred destination for investors seeking long-term growth. The combination of these factors suggests that the Indian stock market is well-positioned to achieve new highs, with the Sensex possibly scaling unprecedented levels by the end of the decade.
New Delhi Stock Exchange