Elevated valuations and optimistic market sentiments in the US raise the likelihood of a meaningful market correction in 2025, according to the Economic Survey 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 that 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,” .
Historical data and research suggest that the Indian equity market has been notably sensitive to movements in the US market. The Nifty 50 has historically shown a strong correlation with the S&P 500, with analysis of daily index returns between 2000 to 2024 revealing that in 22 instances when the S&P 500 corrected by more than 10 per cent, the Nifty 50 posted a negative return in all but one case, averaging a 10.7 per cent decline. On the other hand, during 51 instances when the Nifty 50 experienced a correction of over 10 per cent, the S&P 500 exhibited positive returns in 13 instances, with an average return of -5.5 per cent. “This underscores the asymmetric relationship between the two markets, highlighting a more pronounced impact of the movement in US markets on Indian equities than the other way around,” it said.
Leading indicators
Further evidence shows that S&P 500 returns Granger-cause48 Nifty 50 returns, meaning that changes in the US market are a leading indicator for the Indian market, especially during shocks, while the reverse is not true. This emphasises that Indian markets tend to react more to trends originating in the US, reinforcing the need for caution in the event of a downturn in the latter’s stock market, it said.
In the last five years (2020-24), individuals have invested a net amount of Rs 4.4 lakh crore in the NSE’s cash market segment, with net inflows in 2024 (Jan-Nov’24) surging to a record high of Rs 1.5 lakh crore. This, along with strong indirect participation via mutual funds, has more than made up for volatile FPI outflows over the last five years. Notably, direct and indirect (via mutual funds) ownership of individual investors at 17.6 per cent (as of September 2024) in the NSE-listed companies is now at par with FPIs. This gap was as high as 7.1 percentage points in FY21.