Risks to Indian stock market rally have a US connection

However, India's stock markets overcame challenges of geopolitical tensions to reach new heights in FY25

- Saloni Goel & Neha Joshi

The Economic Survey presented in Parliament on Friday warns of a key risk to surging Indian markets: The survey sees a high possibility of a correction in the US market, which it believes could have a cascading effect on Indian markets, especially on new retail investors who began trading in stocks following 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 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," said the survey.

Changes in the US market are a leading indicator for the Indian market, especially during shocks, but the reverse is not true, the survey said. This suggests that Indian markets tend to react disproportionately to trends originating in the US, reinforcing the need for caution in the event of a downturn in the American stock market.

Retail participation over the last five years, both in terms of investor numbers and trading activity has seen a sharp uptick, with the unique investor base on the National Stock Exchange (NSE) surpassing the 100-million-mark in August 2024, tripling in the last four years.

The survey backs up its warning with historical data and research, which it said suggest that the Indian equity market has been notably sensitive to movements in the US market and that the two markets share an "asymmetric relationship".