LC Ideas: Views & Insights
View for Indian capital markets amidst liquidity crunch
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India's stock markets have experienced sharp corrections in 2025, driven by global macroeconomic concerns and capital outflows from foreign institutional investors (FIIs). However, domestic investors are playing an increasingly prominent role in stabilizing the market, Archit Garg, Executive Director, Capital Markets at Lighthouse Canton in India, said in a conversation with LC IDEAs: Views & Insights.
Archit Garg, Executive Director, Capital Markets, Lighthouse Canton
"We’ve been through a strong correction recently, but we’re close to bottoming out," Garg said. "Despite external volatility, domestic investors have been steadily investing over the past year, cushioning the market from excessive declines."
Overall Garg believes that the Indian market correction appears to be nearing its bottom as strong domestic investor participation, particularly via SIPs and institutional flows, has cushioned declines. Despite global volatility and FPI outflows, resilient economic growth and steady corporate earnings continue to support market fundamentals. Additionally, India's strong GDP growth, government-led infrastructure spending, and robust banking sector performance provide a solid economic foundation.
India's total market capitalisation stands at approximately USD3.2 trillion. Promoters hold about 50%, while domestic institutional investors have a share of around 26% as of June 2024 and retail Investors account for 7.64% of the market, Garg noted.
Foreign institutional investors (FII), traditionally a major force in India's markets, now account for just about 17.5% of total market cap , a 12-year low.
"The influence of FIIs is gradually decreasing, and we see the trend of domestic participation continuing to strengthen," Garg said.
FIIs have been net sellers, offloading around USD 12 billion in the past year. Much of this outflow is driven by global factors, including US policy shifts under the Trump administration, which have favoured domestic industries over emerging markets, Garg explained. "Recent US policy changes on metals and finished goods have created headwinds for both India and China. The impact on India’s capital inflows has been tangible."
Despite these challenges, Garg remains optimistic about market recovery.
"We may see another quarter of sideways movement, but after that, I expect a reversal towards growth," he said.
According to data from the National Stock Exchange (NSE), the Nifty 50 index has fluctuated between 18,500 and 19,200 in early 2025, reflecting market uncertainty but also signs of potential stabilisation.
Also Read: Unlocking of Amplified Narratives - Lighthouse Canton India Outlook Report 2025
A SHIFTING BALANCE
In volatile markets Garg also sees retail and institutional portfolios undergoing a structural transformation in India, as investors increasingly prioritise stability amid volatile market conditions.
According to him he sees more institutional investors shifting towards large-cap holdings, while retail investors continue to play a critical role in mid- and small-cap segments.
"Earlier, if small- and mid-cap stocks comprised nearly 70% of an institutional investor’s portfolio, now, there is a rebalancing towards large caps, with at least 50% of holdings moving into this segment," Garg noted. "This flight to quality will likely continue, especially during times of volatility."
Family offices are also reconfiguring their investment strategies.
"We are witnessing a definitive shift towards structured portfolios, with a clear preference for large-cap and stable assets," Garg said. "Even within private investments, family offices are favouring established, scalable companies."
A report from the Association of Mutual Funds in India (AMFI) highlighted that mutual fund SIP (Systematic Investment Plan) inflows reached a record ₹26,400 crore (USD 3.17 billion) in January 2025, underscoring the growing role of systematic investing.
Additionally, alternative investment funds (AIFs) have reported a significant increase in capital commitments, with the share of alternatives within the asset management space rising to 15.8% in FY24 from 1.2% in FY14, reflecting an institutional pivot toward long-term, structured investments.
These figures reflect the robust activity in India's investment landscape, with significant contributions from SIPs and AIFs.
INVESTMENT TRENDS
India's primary market has remained robust despite broader market volatility.
"In the past year, nearly ₹2.2 lakh crore ($26 billion) in new capital entered Indian markets," Garg noted. Of this, ₹1.5 lakh crore ($18 billion) was raised through IPOs, while Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) collectively attracted around ₹50,000 crore ($6 billion), marking a record year for these asset classes.
"SME exchanges have also gained traction, though they remain a smaller part of the market," Garg said.
Garg expects these trends to persist, with capital markets continuing to favor large, high-quality companies.
"Over the next six months, we anticipate stronger returns in large-cap stocks compared to small- and mid-caps. The reallocation of capital is clear, and it aligns with broader investor sentiment toward stability."
Garg added that rising interest rates and tightening financial conditions often lead investors to favor large-cap stocks, which tend to be more resilient during market fluctuations. Valuations for large caps have also become more attractive post-correction, making them a preferred choice for risk-averse capital.
Beyond public markets, Lighthouse Canton has focused on unlisted investments in large-scale companies.
"We've backed firms like NSE, NSDL, and Swiggy, OYO, SBI AMC etc.all valued in the $2–3 billion range. Our preference remains tilted towards established, scalable businesses," Garg said.
Looking at sectoral trends, consumer discretionary and digital-first companies are attracting investor interest.
"Pre-IPO activity is strong for online platforms disrupting traditional industries. These businesses are market leaders and remain capital-hungry, ensuring continued investor participation," Garg said. He also pointed to pharmaceuticals and automobiles as sectors poised for growth.
Despite near-term headwinds, Garg remains confident in India’s investment landscape.
"Valuations in large-cap, high-quality companies are attractive, and as macro uncertainties ease, we expect capital inflows to pick up again. The resilience of domestic investors will be key in navigating this evolving market environment."
