Equity Market Correction Could Impact Consumption in FY26

Slowing Bank Credit, FII Outflows, and Elevated Valuations Add to Economic Uncertainty

A significant correction in the Indian equity markets, with the Nifty 50 and Sensex plunging nearly 15 percent over the past five months, is raising concerns about its potential impact on consumption and economic growth in FY26. As retail investors witness wealth erosion, economists warn that prolonged market volatility, coupled with capital expenditure delays and global uncertainties, could dampen household spending and broader economic activity.

Market Decline and Economic Slowdown: A Double Blow to Consumption?

“The correction in the equity market has been driven by a mix of macroeconomic deceleration, rising global uncertainties, and foreign institutional investor (FII) outflows. If this downward trend continues in the coming months, it could act as a drag on consumer wealth and, in turn, household consumption in FY26,” said Sakshi Gupta, Vice President & Principal Economist at HDFC Bank.

The current downturn has affected investor confidence, despite government efforts to provide relief through tax incentives. In the Union Budget 2024, Finance Minister Nirmala Sitharaman introduced income-tax relief, increasing the tax rebate income limit to ₹12 lakh from ₹7 lakh, with an estimated ₹1 lakh crore of revenue foregone. However, the sustained market slump has overshadowed these fiscal measures, leaving investors cautious.

Global Uncertainties and Delayed Capital Expenditure Weigh on Growth

According to Sujit Kumar, Chief Economist at the National Bank for Financing Infrastructure and Development (NaBFID), the markets have significantly corrected from their recent highs due to global economic uncertainty and weaker earnings prospects.

“The Indian economy has already seen slower growth, partly due to consumption weakness and delays in capital expenditure. A prolonged market correction could further weigh on household spending, especially for retail investors who have experienced significant wealth erosion in a short period. However, on the positive side, it allows the market to separate strong businesses from weaker ones, leading to more efficient capital allocation,” Kumar added.

Key Factors Contributing to Market Volatility

The ongoing volatility in the Indian equity markets has been attributed to multiple factors, including:

• Macroeconomic slowdown: Slower GDP growth and weak corporate earnings are dampening investor sentiment.
• Geopolitical risks: The Russia-Ukraine war, Middle East tensions, and U.S.-China trade policies are adding uncertainty to global markets.
• Aggressive U.S. Federal Reserve stance: Higher interest rates in the U.S. have led to capital outflows from emerging markets, including India.
• FII outflows: Foreign investors have pulled billions out of Indian equities, leading to increased market volatility.
• Uncertainty over U.S. trade policies: Reports suggest that the U.S. administration may implement reciprocal tariffs on Indian goods, affecting trade relations and investor sentiment.

Economists Call for a ‘Wait-and-Watch’ Approach

Lekha Chakraborty, an Economist at the National Institute of Public Finance and Policy (NIPFP), stated that the current economic downturn is cyclical rather than structural. She warned that premature intervention by the Reserve Bank of India (RBI) could create false expectations among corporates, potentially leading to an increase in dollar exposure and currency risks.

“The optimal approach is to adopt a wait-and-watch stance, allowing the market to self-correct and settle at its natural equilibrium. Any strategic policy adjustments in foreign trade and investments should be made after April 2, when the direction of U.S. trade policies becomes clearer,” she noted.

Elevated Valuations Still a Concern Despite Market Correction

Even after the sharp correction, Indian equity valuations remain higher than many global counterparts, including China. Some market experts warn of “irrational exuberance” in pockets of the market, indicating that stock prices could still be overvalued relative to economic fundamentals.

“Despite the ongoing correction, Indian stocks remain relatively expensive. Concerns over slowing bank credit growth, rising temperatures impacting productivity, and sustained FII outflows suggest that equities may continue facing headwinds in the near term,” said Manoranjan Sharma, Chief Economist at Infomerics Valuation & Rating Ltd.

Impact on Consumption and Domestic Demand in FY26

While the long-term outlook for India’s economy remains strong, economists caution that the immediate impact of market losses on household wealth could negatively influence consumer spending trends in FY26.

• Weak investor sentiment may lead to lower discretionary spending on luxury goods, travel, and entertainment.
• Declining stock portfolios may cause households to cut back on large purchases, such as real estate and automobiles.
• Lower risk appetite among investors could lead to reduced participation in the stock market, affecting overall liquidity.

However, some experts believe that a shift in investor focus toward safer asset classes, such as bank deposits and bonds, could stabilize financial markets in the coming quarters.

Looking Ahead: Will the Market Recover in FY26?

Despite the current downturn, analysts believe that Indian equities could rebound if key factors align:

• Earnings recovery: If corporate earnings show signs of improvement in upcoming quarters, investor confidence may return.
• Stabilization of FII outflows: A slowdown in foreign capital exits could help ease market volatility.
• Policy support from the government and RBI: Strategic fiscal measures and monetary policy adjustments could support a recovery in domestic demand.

While the long-term economic fundamentals of India remain robust, the next few months will be critical in determining the pace of recovery. Investors, policymakers, and businesses will be watching closely to see whether the market stabilizes or if further downside risks emerge.

For now, the uncertainty continues, and consumption trends in FY26 will depend heavily on how quickly the equity markets regain stability.