Sounding a note of caution on the elevated stock market valuation, the Economic Survey on Friday said any correction in the US markets could have a cascading effect in India, which has witnessed increased participation from young investors post-Covid.

Over the past few years, retail participation, especially from young investors, has significantly increased in the equity markets. Investor participation has grown from 4.9 crore in FY20 to 13.2 crore as of December 31, 2024.

“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,” the Survey noted.

According to the survey, the rise in retail participation aligns with a steady decline in the five-year rolling beta between the Nifty 50 and the S&P 500 in the last four years, suggesting a reduced sensitivity of Indian markets to US market movements.

This decoupling is further evidenced by the increasing resilience of Indian markets during periods of FPI (Foreign Portfolio Investors) outflows.

For instance, in October 2024, despite FPI outflows of USD 11 billion, the Nifty 50 index was corrected by only 6.2 per cent, thanks to strong downside support provided by domestic institutional and individual investors.

In contrast, during the March 2020 pandemic-driven market sell-off, FPI outflows of USD 8 billion triggered a steep 23 per cent market decline.

“Even as the resilience demonstrated by the Indian market, supported by growing retail participation, is promising, the risks associated with a potential US market correction cannot be overlooked, given historical trends,” the Economic Survey 2024-25 said.

Historical data suggests 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 and 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.