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Published 15:36 IST, January 31st 2025

Economic Survey 2025: What Risks Could Impact The Stock Market This Year?

India's Economic Survey 2025, presented by Finance Minister Nirmala Sitharaman, highlights key concerns for the Indian stock market in 2025.

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Economic Survey 2025: What Risks Could Impact the Indian Stock Market This Year?
Economic Survey 2025: What Risks Could Impact the Indian Stock Market This Year? | Image: Republic

Economic Survey 2025, presented today in Parliament by Finance Minister Nirmala Sitharaman, outlines a cautiously optimistic economic forecast for FY 2025-26. While the economy is expected to grow steadily, the survey warns about potential risks to the Indian stock market in 2025.

With markets open on Budget Day, investors are closely watching how stocks will react. But beyond just one day's movement, the real question is how the Indian stock market will perform throughout 2025.

US Market Corrections Could Trigger Volatility in India

The US stock market dominates global indices, making up 75% of the MSCI World Index (as of November 2024).

If the US market crashes, it can create ripple effects across the world, including in India.

‘any correction in its market could have profound ripple effects on global markets, including India, underscoring the need for heightened vigilance,’ as mentioned in the survey

US Market Is at a Record High—A Crash Could Happen

The S&P 500 Index surged 24% in 2023 and is on track to gain another 20% in 2024.

US companies reported record profits of $4 trillion in Q3 2024, leading to overvalued stock prices.

The top 5 tech giants (Apple, Microsoft, Amazon, Alphabet, Nvidia) are driving most of the gains, making the market vulnerable to sudden corrections.

If the US market corrects in 2025, history suggests that the Indian stock market will also decline, even if India's economy remains strong

Historical Data Shows Indian Stocks React to US Market Drops

The Nifty 50 Index, India’s benchmark stock index, has a strong link to US markets:

Since 2000, whenever the S&P 500 dropped by 10% or more, Nifty 50 also fell in 21 out of 22 cases.

On average, Nifty dropped by 10.7% during these US market corrections.

However, the reverse is not always true. If Nifty 50 falls, the US market does not necessarily decline. This means that India's stock market is more affected by the US than vice versa.

‘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,’ as reads the survey.

Rising Retail Investors: A Strength or a Risk?

The number of retail investors in India has tripled in the last four years.
In August 2024, the National Stock Exchange (NSE) surpassed 10 crore unique investors

Why This Could Be a Risk
Many new investors entered the stock market after COVID-19 and have never experienced a market crash.

If markets fall sharply, retail investors might panic-sell, worsening the decline.
Inexperienced traders using borrowed money (margin trading) could face huge losses.


How This Compares to Past Crashes
In March 2020, when COVID-19 hit, foreign investors withdrew $8 billion, causing a 23% drop in Nifty 50. But in October 2024, when foreign investors pulled out $11 billion, Nifty only fell 6.2% because retail and domestic investors supported the market. This suggests that Indian markets are becoming more resilient, but retail investors' behaviour remains unpredictable in times of crisis.

What Are the Major Risks for Indian Markets in 2025?

A major correction in US stock markets could trigger panic selling in India.
Retail investor panic in a downturn could accelerate market falls.
Global economic slowdown may impact corporate earnings, leading to lower stock prices.
Rising interest rates in the US could pull foreign investments away from India.

Get the latest live news on Republic Business, along with breaking news and top headlines from Budget 2025, business, economy, markets, and around the world.

Updated 15:36 IST, January 31st 2025