MUMBAI (Reuters) – A sharp correction in the equity markets could hurt sentiment and spending by India’s retail investors, the government’s Economic Survey said on Friday.
The survey, presented a day ahead of the annual budget, details the state of the economy while flagging longer-term economic and policy issues.
Retail investors’ participation in India’s equity markets is at a record high, and many have entered the market after COVID-19, never having witnessed a significant and prolonged market correction, the survey said.
“Hence, if one were to occur, its impact on sentiment and spending may be non-trivial,” the survey said.
India’s equity benchmarks have slumped after hitting record highs in September last year with several key indexes entering a technical correction towards the end of 2024.
The number of individuals who traded at least once a month in the National Stock Exchange’s cash market increased from 3.2 million in January 2020 to 14 million in November 2024.
In the last five years, individual investors have invested 4.4 trillion rupees ($50.79 billion) in the cash market, with additional investments also coming in via mutual funds.
Greater participation in equities, coupled with strong gains generated by Indian equities in recent years have increased household wealth by 40 trillion rupees in the last five years, data from NSE show.
However, Indian equities have become increasingly correlated with the U.S. markets, which could pose a risk to the outlook in 2025, the survey said.
“Elevated valuations and optimistic market sentiments in the U.S. raise the likelihood of a meaningful market correction in 2025,” it said, adding that such a correction could have a “cascading effect” on India, given the increased participation of young, relatively new retail investors.
($1 = 86.6300 Indian rupees)
(Reporting by Ira Dugal; Editing by Mrigank Dhaniwala)
