Sounding a note of caution on the elevated stock market valuation, the Economic Survey 2024-25 on Friday (January 31, 2025) said any correction in the U.S. markets could have a cascading effect in India, which has witnessed increased participation from young investors post-COVID.
Over the past few years, retail participation, especially from young investors, has significantly increased in the equity markets. Investor participation has grown from 4.9 crore in FY20 to 13.2 crore as of December 31, 2024.
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“Elevated valuations and optimistic market sentiments in the U.S. raise the likelihood of a meaningful market correction in 2025. Should such a correction occur, it could have a cascading effect on India, especially given the increased participation of young, relatively new retail investors.”
“Many of these investors who have entered the market post-pandemic have never witnessed a significant and prolonged market correction. Hence, if one were to occur, its impact on sentiment and spending may be non-trivial,” the Survey noted.
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According to the Survey, the rise in retail participation aligns with a steady decline in the five-year rolling beta between the Nifty 50 and the S&P 500 in the last four years, suggesting a reduced sensitivity of Indian markets to U.S. market movements.
This decoupling is further evidenced by the increasing resilience of Indian markets during periods of FPI (Foreign Portfolio Investors) outflows. For instance, in October 2024, despite FPI outflows of $11 billion, the Nifty 50 index was corrected by only 6.2%, thanks to strong downside support provided by domestic institutional and individual investors.
In contrast, during the March 2020 pandemic-driven market sell-off, FPI outflows of $8 billion triggered a steep 23% market decline.
“Even as the resilience demonstrated by the Indian market, supported by growing retail participation, is promising, the risks associated with a potential U.S. market correction cannot be overlooked, given historical trends,” the Economic Survey 2024-25 said.
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Historical data suggests that the Indian equity market has been notably sensitive to movements in the U.S. market. The Nifty 50 has historically shown a strong correlation with the S&P 500, with analysis of daily index returns between 2000 and 2024, revealing that in 22 instances when the S&P 500 corrected by more than 10%, the Nifty 50 posted a negative return in all but one case, averaging a 10.7% decline.
On the other hand, during 51 instances when the Nifty 50 experienced a correction of more than 10%, the S&P 500 exhibited positive returns in 13 instances, with an average return of -5.5%.
This suggests the “asymmetric relationship between the two markets, highlighting a more pronounced impact of the movement in the U.S. markets on Indian equities than the other way around.”
The Survey stressed that the capital markets are central to India’s growth story, catalysing capital formation for the real economy, enhancing the financialisation of domestic savings, and enabling wealth creation.
As of December 2024, the Indian stock market has achieved new highs, with intermittent corrections, in the midst of geopolitical uncertainties, currency depreciation and domestic market volatility challenges. Investor participation has been a contributor, with the number of investors growing from 4.9 crore in FY20 to 13.2 crore as of December 31, 2024.
This growth, combined with active listing activity and recent measures by the regulator, Securities and Exchange Board of India (SEBI), to temper excesses, is expected to foster sustainable market expansion.
The primary markets continued to witness heightened listing activities and investor enthusiasm in FY25, notwithstanding the market volatility and geopolitical uncertainties. As per the E&Y Global IPO trends, Indian stock exchanges provide conducive market conditions for foreign conglomerates to list their local subsidiaries, thereby offering a good opportunity for unlocking value.
India’s share in global IPO listings surged to 30% in 2024, up from 17% in 2023, making it the leading contributor of primary resource mobilisation globally.
Published – January 31, 2025 04:01 pm IST
