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The Economic Survey 2025 has issued a stark warning regarding the potential for a significant correction in the US stock market to negatively impact India's own financial landscape. The report highlights the interconnectedness of the two markets, despite recent trends suggesting a decoupling. While increased participation by retail investors in India has demonstrably strengthened the domestic market's resilience to external shocks, the survey emphasizes that the historical correlation between the US's S&P 500 and India's Nifty 50 indices remains a significant risk factor. Past data reveals that during periods of significant decline in the S&P 500 (exceeding 10%), the Nifty 50 has almost always followed suit, experiencing an average drop of 10.7%. This suggests a strong influence of US market movements on Indian equities, a pattern that cannot be ignored even with the increased domestic investor base.
The surge in retail investor participation in the Indian stock market over the past four years is a key element in this complex equation. The number of unique investors at the National Stock Exchange (NSE) has more than tripled, reaching over 10 crore by December 2024. This dramatic increase in participation, coupled with robust equity performance, has led to a significant increase in household wealth tied to Indian equities. This domestic strength has provided a buffer against foreign portfolio investor (FPI) outflows, as evidenced by the October 2024 event where, despite USD 11 billion in FPI withdrawals, the Nifty 50 index only declined by 6.2%. This contrasts sharply with the 23% decline witnessed in March 2020 during the COVID-19 pandemic, when similar FPI outflows occurred. The reduction in the 5-year rolling beta between the Nifty 50 and the S&P 500 over the past four years suggests a decreasing dependence on US market fluctuations. However, the Economic Survey cautions against complacency.
The Economic Survey 2025 points to several factors within the US market that elevate the risk of a correction. These include elevated valuations, peak corporate earnings concentrated in a few tech giants, and widespread investor optimism. The reliance of these tech giants on government spending, which has increased significantly, adds another layer of concern. Further compounding the risk is the high investor appetite for sophisticated financial instruments linked to alternative assets, a situation reminiscent of the pre-Global Financial Crisis (GFC) period. The survey emphasizes that the US market, accounting for 75% of the MSCI World Index, plays a dominant role in global market dynamics. Any significant downturn in the US could trigger a cascading effect globally, impacting India despite its increased domestic resilience. The vulnerability lies in the inexperience of a significant portion of these new retail investors. Many have not witnessed a prolonged market correction, meaning the psychological impact of such an event could be substantial and unpredictable, affecting both market sentiment and consumer spending.
The Economic Survey's warning underscores the need for careful monitoring of both US and Indian market indicators. While the increased domestic participation has demonstrably strengthened the Indian market's position, it's crucial to acknowledge that historical correlations remain a significant risk factor. The unbalanced nature of this relationship, with US market movements exerting a stronger influence on Indian equities than vice versa, necessitates proactive risk management strategies. The relatively recent increase in retail investment, while a positive development for the Indian market, also introduces a new layer of uncertainty, as the behavior of these newer investors during a market correction remains largely untested. The potential for a cascading effect, triggered by a US market correction, demands cautious optimism and vigilant monitoring of both domestic and global economic indicators.
Source: Economic Survey 2025 warns: US market correction may have 'cascading effect' on Indian stock market