Any correction in US markets could have a cascading effect on India: Economic Survey

“With the US comprising 75 per cent of the MSCI World Index (as of November 2024), any correction in its market could have profound ripple effects on global markets, including India, underscoring the need for heightened vigilance,” the Survey said.

The Survey said that currently the US financial landscape is characterised by high stock market valuations, record corporate profits and extremely optimistic investor sentiment. 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 ratio (Cyclically Adjusted Price-Earnings Ratio), warrants some caution.

“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,” the Survey said.

“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,” it said.

Investor participation domestic stock market has jumped from 4.9 crore in FY20 to 13.2 crore as of December 31, 2024.

Addressing the media after tabling Economic Survey 2024-25 in Parliament, Chief Economic Advisor (CEA) V Anantha Nageswaran said global stock markets also have become badly volatile as recently witnessed.

“…the massive growth in retail participation in the Indian stock market is definitely a good thing but when the market corrects, it could have implications on spending intentions and sentiments,” Nageswaran said, adding that the Survey has taken into consideration this factor while arriving at gross domestic product (GDP) growth projection of 6.3-6.8 per cent in the financial year 2025-26.

The Survey further said that 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 that evidence shows that S&P 500 returns Granger-cause 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.

Granger causality is a statistical concept that determines if one variable can predict another variable based on its past values.

“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.

Surge in retail participation

The survey said that the unique investor base at the National Stock Exchange (NSE) surpassed the 10-crore mark in August 2024, tripling in the last four years, and currently stands at 10.9 crore (as of 26 December 2024). The number of client codes, indicating a number of investor accounts at NSE, has risen from a little under six crore at the end of 2019 to nearly 21 crore as of December 2024.

Regarding activity, the number of individuals that traded at least once a month in the NSE’s cash market segment increased from nearly 32 lakh in January 2020 to around 1.4 crore in November 2024.

The number of demat accounts have risen sharply by 33 per cent to 18.5 crore at the end of December 2024 on a year-on-year basis.