Dangers to Indian inventory market rally have a US connection, suggests Financial Survey. Particulars right here

Financial Survey Highlights: Whereas the Financial Survey 2024-25 tabled by the Finance Minister Nirmala Sitharaman within the Parliament at this time, January 31, highlighted the stellar progress of the Indian inventory market within the face of many adversities comparable to geopolitical uncertainties, and foreign money depreciation volatility, it additionally flagged a key danger for Dalal Road going forward.

In line with the Financial Survey, the largest danger Indian markets face is linked to the US. The survey sees a excessive chance of a correction within the US market, which it believes may have a cascading impact on the Indian markets, particularly on the brand new retail traders who’ve dabbled into equities in the course of the COVID-19 pandemic.

“Elevated valuations and optimistic market sentiments within the US elevate the probability of a significant market correction in 2025. Ought to such a correction happen, it may have a cascading impact on India, particularly given the elevated participation of younger, comparatively new retail traders. Many of those traders, who’ve entered the market post-pandemic, have by no means witnessed a major and extended market correction. Therefore, if one have been to happen, its influence on sentiment and spending could also be non-trivial.

Retail participation during the last 5 years, each by way of investor numbers and buying and selling exercise has seen a pointy uptick, with a singular investor base on the Nationwide Inventory Trade (NSE) surpassing the 10-crore mark in August 2024, tripling within the final 4 years.

India-US Join: Historic Development

Historic knowledge and analysis recommend that the Indian fairness market has been notably delicate to actions within the US market, with the 2 markets sharing an uneven relationship.

Twenty-four-year historical past, from 2000 to 2024, reveals when the S&P 500 fell by greater than 10%, the Nifty 50 additionally dropped in nearly each case, with a median decline of 10.7%.

Alternatively, when the Nifty 50 dropped by greater than 10%, the S&P 500 went up in some instances, however on common, it had a smaller decline of about 5.5%.

Due to this fact, the Indian markets are inclined to react extra to developments originating within the US, reinforcing the necessity for warning within the occasion of a downturn within the latter’s inventory market, the Survey flagged.

Why may US markets right in 2025?

The US inventory market may face a correction because of a number of components, as highlighted by the Survey. First, valuations are at very excessive ranges, with the S&P 500’s price-to-earnings ratio close to its third-highest level ever. This means the market is likely to be overvalued. Second, the latest rally has been primarily pushed by a couple of massive tech firms like Apple and Microsoft, which means the broader market shouldn’t be as robust. The S&P 500 Equal Weight Index, which provides equal significance to all firms, reveals a lot weaker progress in comparison with the common index.

Moreover, investor sentiment is overly optimistic, with excessive expectations for inventory costs regardless of potential dangers, comparable to geopolitical tensions or financial slowdowns. Lastly, considerations are rising concerning the sustainability of company earnings, particularly as they’re concentrated in a couple of tech giants and supported by authorities spending.

Indian financial system in robust stead

Whereas the survey highlighted dangers to Indian markets, the outlook for the Indian financial system stays robust regardless of challenges. The survey pegged the FY26 actual GDP progress within the 6.3%-6.8% bracket.

“The financial survey 2025 means that the Indian financial system is predicted to develop regardless of world challenges. It says that India would be capable to hold a verify on inflation, CAPEX growth has sustained that alerts improved quarterly numbers from the listed entities, and stability within the banking sector can also be a optimistic signal for the rate-sensitive segments. The financial survey for 2025 additionally hints originally of the decrease rate of interest regime in FY26, which is predicted to gas banking and allied segments. Nonetheless, the geopolitical uncertainty goes to persist, stated Avinash Gorakshkar, Head of Analysis at Profitmart Securities.

Disclaimer: The views and proposals above are these of particular person analysts or broking firms, not Mint. We advise traders to verify with licensed consultants earlier than making any funding selections.