The Unending Churn in the Markets

If one were to read Adil Rustomjee’s delightful book, Running Behind Lakshmi, which covers the journey of capital markets in India for over a century, one would conclude that change is the only constant in the capital markets. Over the last five years the pace of change has accelerated even more. From $ 3.1 trillion in FY 23, the market capitalization in India scaled a peak of $ 5.6 trillion in September 2024 mainly because of large cap surge. Companies with over Rs 1 lac market capitalization increased from only 2 in 2004 to 81 by 2024. But in early 2026 India’s market capitalization was down at $ 4.97 trillion. In the global pecking order India finds itself in the 5^th place with about 4% share of the global capitalization. But much smaller countries like Taiwan and South Korea are snapping at our heals with market capitalization of $ 4.67 and $ 4.59 trillion, respectively and growing much more rapidly. While FII holding in India is at 16.3% of the market, a 14 year low and still coming down, they continue to invest in Taiwan and Korea. More sobering is the fact that just one company, namely, Nvidia of the US has market capitalization of $ 5.27 trillion, much higher than the that of 5000 plus listed companies in India. The explanation to this churn lies in the AI boom that is sweeping the markets. In a recent report, JP Morgan, while downgrading India’s weight to ‘Neutral’, said that large cap index (Sensex/Nifty) had minimal AI, data centre and semiconductor representation relative to Korea, Taiwan, China and even the UK.

In studying the churn in the Sensex over 10year slots, Ambit Capital found that the churn peaked at 67% (20 replacements in the 30 stock index) in the years following the 1991 reforms (1993-95). It then fell to a low of 27% (8 replacements) in 2004-14. But Ambit Capital which was betting on new-age companies breaking into the Sensex, got its 2015 prognosis, that by 2025 the likes of Reliance Industries, L&T, SBI, Tata Steel, etc., could retire from the benchmark, wrong. The important point is that, despite all the prevailing hype about its tech prowess, India has missed the AI bus. But it may not still be not too late to cover lost ground. Actually, old economy companies, especially in the defense, energy, automobile and oil sectors are adopting both AI and robotics to stay relevant. Revolution is happening in fintech too. New age companies like National Payments Corporation of India and National Stock Exchange are waiting in the wings which on listing may not take too long to break into the benchmark. However, we need more such companies that have scale to take on global giants in sunrise fields of semiconductors, green hydrogen, renewable energy, electric vehicles, data centres, aerospace and biotechnology.

Capital markets are witnessing churn of yet another kind. NSE’s latest Market Pulse report points out that over the last three decades global markets have undergone marked shift in sectoral composition. US Markets, for instance, have seen sharp rise in technology dominance, while China has transitioned from real estate led model to a balanced mix of technology and financials. On the other hand Japan’s market structure has remained relatively stable, with gradual diversification. India’s transition has been distinct. From a commodity led market to one increasingly dominated by financials, alongside a declining share of materials and energy. According to the NSE report, while there is rising concentration in the US markets, India has moved in the opposite direction, with declining concentration indicating broader dispersion across firms and sectors. This is reflected in the fact the retail investors are channeling increasing amounts into flexi cap and well-diversified large and multi-cap funds. The following table gives sector-wise share of capitalization in India over the last 30 years.

Source: LSEG Workspace, NSE EPR

Another major shift is ownership changes in aggregate shareholding in the Indian capital market. As per Prime Database, FPI holding which peaked at 25.72% in March 2023 has fallen to a 14 year low of 16.3% in 2026. In contrast domestic institutional investors (including MFs at 11.1%) have hit a peak of 18.72% of holdings.

FPI holdings increased in communication services and energy, while there was decline or no change in other sectors. But FPIs continue to remain the largest non-promoter shareholders in financials.

Unlike earlier periods when a handful of sectors or stocks drove market movement, the current diversification signals a clear progression towards market maturity. But what does “market maturity” really mean? A market where diversification facilitates risk management with reduced volatility? Or does it signal an economy that is reluctant to invest enough in Research and Development and hence shy of exploring new technologies and scripting a story of global leadership in a new and emerging sector? A story of lost opportunities?