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The Economic Survey 2025 has issued a stark warning regarding the potential for a cascading effect on the Indian stock market should a significant correction occur in the US market. This warning is particularly pertinent given the substantial increase in retail investor participation in India's equity markets over the past few years. The surge in individual investors, driven partly by the pandemic and the strong performance of Indian equities, has led to a considerable increase in household wealth invested in the market. While this domestic participation has seemingly reduced the Indian market's dependence on foreign portfolio investors (FPIs) and lessened the immediate impact of US market fluctuations, historical data reveals a persistent correlation between the two markets. The analysis points to a significant historical relationship between the performance of the Nifty 50 index and the S&P 500, indicating that the Indian stock market has historically responded strongly to downturns in the US market.
The Economic Survey highlights several factors contributing to the heightened risk. Elevated valuations and optimistic market sentiments in the US, coupled with concerns about the sustainability of corporate profits – particularly within the technology sector and their dependence on government spending – increase the probability of a substantial US market correction. Furthermore, the current investor appetite for complex financial instruments and alternative assets mirrors a similar pre-GFC exuberance. The Survey emphasizes that a correction in the US market, which accounts for a significant portion of global indices, could have a far-reaching impact. The report underscores that many new retail investors in India lack experience navigating a prolonged market downturn, raising concerns about the potential psychological and financial repercussions for these individuals should a significant correction materialize.
While the Indian market has displayed greater resilience to FPI outflows in recent years, largely due to the increased domestic participation, the historical data clearly indicates a persistent link to US market movements. The Granger causality test results strongly suggest that changes in the S&P 500 tend to precede changes in the Nifty 50, implying a directional influence from US markets to Indian markets, particularly during times of significant market disruption. This highlights the vulnerability of the Indian market to external shocks. The report's concern stems from the potential for a cascading effect, where a correction in the US could trigger a decline in Indian markets, impacting not just investor sentiment but also overall consumer spending and economic confidence.
The increased participation of retail investors, while contributing to the market's apparent resilience, also introduces a new element of vulnerability. The relatively inexperienced nature of many of these investors means that a significant market correction could have a more profound impact on investor behavior and confidence compared to previous downturns. Their reaction to such an event could amplify the negative impact on the market, potentially leading to a more severe and prolonged correction than might otherwise be expected. Therefore, the Economic Survey's warning is not merely a prediction of a possible downturn, but a cautionary note about the potential magnitude and wider consequences of such an event given the current market dynamics.
The Economic Survey's recommendation is for close monitoring of the US market and the development of strategies to mitigate the potential impact of a US-led correction. This could include measures aimed at bolstering investor confidence, educating retail investors about risk management and market volatility, and possibly implementing regulatory mechanisms to curb excessive risk-taking. Given the interconnectedness of global financial markets, the potential consequences of a significant US market correction extend beyond India, underscoring the need for careful consideration and proactive measures by policymakers and regulators globally. The future trajectory of the Indian stock market remains intertwined with global economic trends, emphasizing the importance of vigilant monitoring and strategic adaptation.
Source: Economic Survey 2025 warns: US market correction may have 'cascading effect' on Indian stock market