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Informist, Friday, Jan. 31, 2025

--EconSurvey: Green shoots in capital formation visible 

MUMBAI - The Economic Survey for the financial year 2024-25 (Apr-Mar) highlighted the sensitivity of Indian equities to movements in the US market, noting that a potential meaningful market correction in the US in 2025 could have a cascading effect on India. With a large number of young and relatively new retail investors in India, such a correction in the US could have a non-trivial impact on sentiment and spending here, the survey said.

The survey was tabled by Finance Minister Nirmala Sitharaman in Parliament Friday. The US market has experienced strong performance in recent years, fuelled by robust corporate earnings. The S&P 500 index is expected to have risen by more than 20% in 2024, following a 24% gain in the previous year.

"That said, the surge in US stock market valuations to an unattractive zone, currently at their third-highest levels as indicated by Shiller's S&P 500 CAPE ratio (Cyclically Adjusted Price-Earnings Ratio), warrants some caution," the survey said. The survey also highlighted that gains in the US market have been largely concentrated in a few mega-capitalised technology companies such as Apple, Microsoft, Alphabet, and Nvidia. In addition to this concentration, the US Federal Reserve's dot plot now suggests a 50-basis-point rate cut in 2025, lower than the previous guidance of cuts amounting to 100 bps.

There is a strong correlation between the Nifty 50 and the S&P 500, the survey said. From 2000 to 2024, the American indices have experienced 22 corrections of over 10%, and during these times, the Nifty 50 has also contracted in all but one instance, it noted. The data show that US market movements have a more significant impact on Indian equities than the reverse.

Given the increased valuations and optimistic market sentiment in the US, a meaningful market correction on Wall Street appears likely.

CAPITAL FORMATION
Green shoots in capital formation are visible, the survey said. "The capital markets have demonstrated strong performance, driving capital formation in the real economy, increasing the financialisation of domestic savings, and supporting wealth creation," the document stated.

The number of investors in India has grown to 132 million as of Dec. 31, from 49 million in FY20.

In the primary markets, India's share in global initial public offer listings surged 30% in 2024 compared to an increase of 17% in 2023.

The document noted that India's debt market, in contrast to the equity market, remains under-capitalised. India's corporate bond market is only 18% of the country's GDP, compared with 80% in South Korea and 36% in China. Currently, the market for corporate bonds comprises high-end bonds. Issuers who are unable to get the top ratings are unable to access the bond market, which may explain why most issuers are non-banking finance companies or public-sector undertakings, the survey said.  End

Reported by Anand JC

Edited by Subhojit Sarkar

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