Risks to Indian stock market rally have a US connection, suggests Economic Survey. Details here | Stock Market News

Economic Survey Highlights: While the Economic Survey 2024-25 tabled by the Finance Minister Nirmala Sitharaman in the Parliament today, January 31, highlighted the stellar growth of the Indian stock market in the face of many adversities such as geopolitical uncertainties, and currency depreciation volatility, it also flagged a key risk for Dalal Street going ahead.

According to the Economic Survey, the biggest risk Indian markets face is linked to the US. The survey sees a high possibility of a correction in the US market, which it believes could have a cascading effect on the Indian markets, especially on the new retail investors who have dabbled into equities during the COVID-19 pandemic.

“Elevated valuations and optimistic market sentiments in the US 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.

Retail participation over the last five years, both in terms of investor numbers and trading activity has seen a sharp uptick, with a unique investor base on the National Stock Exchange (NSE) surpassing the 10-crore mark in August 2024, tripling in the last four years.

India-US Connect: Historical Trend

Historical data and research suggest that the Indian equity market has been notably sensitive to movements in the US market, with the two markets sharing an asymmetric relationship.

Twenty-four-year history, from 2000 to 2024, shows when the S&P 500 fell by more than 10%, the Nifty 50 also dropped in almost every case, with an average decline of 10.7%.

On the other hand, when the Nifty 50 dropped by more than 10%, the S&P 500 went up in some cases, but on average, it had a smaller decline of about 5.5%.

Therefore, the 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, the Survey flagged.

Why could US markets correct in 2025?

The US stock market could face a correction due to several factors, as highlighted by the Survey. First, valuations are at very high levels, with the S&P 500’s price-to-earnings ratio near its third-highest point ever. This suggests the market might be overvalued. Second, the recent rally has been mainly driven by a few large tech companies like Apple and Microsoft, meaning the broader market is not as strong. The S&P 500 Equal Weight Index, which gives equal importance to all companies, shows much weaker growth compared to the regular index.

Additionally, investor sentiment is overly optimistic, with high expectations for stock prices despite potential risks, such as geopolitical tensions or economic slowdowns. Finally, concerns are growing about the sustainability of corporate earnings, especially as they are concentrated in a few tech giants and supported by government spending.

Indian economy in strong stead

While the survey highlighted risks to Indian markets, the outlook for the Indian economy remains strong despite challenges. The survey pegged the FY26 real GDP growth in the 6.3%-6.8% bracket.

“The economic survey 2025 suggests that the Indian economy is expected to grow despite global challenges. It says that India would be able to keep a check on inflation, CAPEX expansion has sustained that signals improved quarterly numbers from the listed entities, and stability in the banking sector is also a positive sign for the rate-sensitive segments. The economic survey for 2025 also hints at the beginning of the lower interest rate regime in FY26, which is expected to fuel banking and allied segments. However, the geopolitical uncertainty is going to persist, said Avinash Gorakshkar, Head of Research at Profitmart Securities.

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