The Economic Survey has issued a warning about a significant market correction that could occur in 2025, potentially impacting sentiment and spending due to the growing number of young retail investors in the market. Many of these investors only entered the market after the pandemic and have not experienced a major and sustained market correction before.
The number of unique investors at the NSE exceeded 10 crore in August last year, marking a three-fold increase over the past four years, reaching 10.9 crore by the end of December. The number of individuals trading monthly in the NSE’s cash market segment rose from around 32 lakh in January 2020 to 1.4 crore in November last year. Household wealth in Indian equities has grown by over ₹40 lakh crore in the five years leading up to September 2024.
The survey also pointed out the close correlation between Indian and US equities. In instances where the S&P 500 corrected by more than 10 percent between 2000 and 2024, the Nifty 50 posted negative returns in all but one instance, averaging a 10.7 percent decline.
The survey emphasized the potential impact of a US market correction on global markets, including India, as the US market comprises a significant portion of the MSCI World Index. Additionally, the high valuations of the US stock market, currently at their third highest levels based on Shiller’s S&P 500 CAPE ratio, pose a risk that warrants caution.
Despite the increasing retail participation in the Indian market, the survey highlighted a reduced sensitivity of Indian markets to US market movements in recent years. This decoupling has been demonstrated by the resilience of Indian markets during periods of FPI outflows. Although FPI outflows of $11 billion in October last year led to a modest 6.2 percent correction in the Nifty 50, the market experienced a 23 percent decline during the pandemic-induced sell-off in March 2020 with FPI outflows of $8 billion.
The survey noted that in the last five years, individuals have invested a net ₹4.4 lakh crore in the NSE’s cash market segment, with record high net inflows of ₹1.5 lakh crore until November last year. The ownership of individual investors, both direct and indirect, in NSE-listed companies has now reached parity with FPIs, reflecting a shift in the market landscape.
While the increase in retail investors poses risks associated with a potential US market correction, the survey also highlighted the potential transformation of the securities market into a more diverse, inclusive, and resilient platform for wealth creation in the long run.
