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The Economic Survey warned of a meaningful market correction in 2025, which could have a cascading effect on sentiment and spending, given the increased participation of young, relatively new retail investors. Many of these investors entered the market post-pandemic and have never witnessed a significant and prolonged market correction.
The unique investor base at the NSE surpassed the 10-crore mark in August last year, tripling in the last four years and touching 10.9 crore at the end of December. The number of individuals who traded at least once a month in the NSE’s cash market segment increased from about 32 lakh in January 2020 to 1.4 crore in November last year. Household wealth in Indian equities has increased by over ₹40 lakh crore in the last five years ending September 2024.
The survey highlighted the strong correlation between Indian and US equities. Between 2000 and 2024, the Nifty 50 posted a negative return in all but one of the 22 instances when the S&P 500 corrected by more than 10 per cent and averaged a 10.7 per cent decline.
“With the US comprising 75 per cent of the MSCI World Index, any correction in its market could have profound ripple effects on global markets, including India, underscoring the need for heightened vigilance,” the survey said.
It added that the surge in US stock market valuations to an unattractive zone, currently at their third highest levels as indicated by Shiller’s S&P 500 CAPE (Cyclically Adjusted Price-Earnings) ratio, warrants caution. Over the last two years, the rally has been largely driven by a few mega-cap technology companies such as Apple, Microsoft, Amazon, Alphabet, and Nvidia.
To be sure, the rise in retail participation has led to a steady decline in the 5-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 US market movements. This decoupling is further evidenced by the increasing resilience of Indian markets during periods of FPI outflows. For example, in October last year, the Nifty 50 corrected by only 6.2 per cent, despite FPI outflows of $11 billion. In contrast, during the March 2020 pandemic-driven market sell-off, FPI outflows of $8 billion triggered a 23 per cent market decline.
In the last five years, individuals invested a net ₹4.4 lakh crore in the NSE’s cash market segment, with net inflows last year surging to a record high of ₹1.5 lakh crore until November. Direct and indirect ownership of individual investors, at 17.6 per cent as of September last year in NSE-listed companies, is now at par with FPIs. This gap was as high as 7.1 percentage points in FY21.
“Even as the resilience demonstrated by the Indian market, supported by growing retail participation, is promising, the risks associated with a potential US market correction cannot be overlooked, given historical trends,” the survey said.
The increase in the number of investors, however, may eventually transform the securities market into a more diverse, inclusive, and robust platform for wealth creation, it added.
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