By Bharath Rajeswaran, Siddhi Nayak and Vivek Kumar M
BENGALURU/MUMBAI (Reuters) – As India’s longest equity slump in nearly three decades wipes out roughly $1 trillion in market capitalization, the major blow to retail investors is denting consumer spending and threatening to further slow growth in the world’s fifth-largest economy.
Investors trying to catch their breath may have to wait longer for the selloff to ebb, analysts say, as uncertainty about the impact on global growth from a burst of policies under U.S. President Donald Trump adds to worries over weak domestic earnings and persistent foreign outflows.
That spells more trouble for consumer spending and the broader economy, which is expected to grow at its slowest pace in four years in the current financial year due to weak urban demand. Consumer spending, already hurt by sluggish income growth and high inflation, makes up half of India’s gross domestic product.
“The equity market correction could result in a moderation of household investment and urban consumption demand, and that could possibly weigh on economic growth,” said Gaura Sen Gupta, India economist at IDFC FIRST Bank.
Sonal Varma and Aurodeep Nandi, economists at Nomura, concurred, cautioning that “income struggles and balance sheet stress” will drag on urban consumption and growth.
The income strains have intensified for many investors including 31-year-old Mumbai-based Vilas Sahay, after the benchmark NSE Nifty 50 and BSE Sensex indices tumbled about 14% since September; the retail-focussed small-cap and mid-cap indices have fared even worse, dropping over 20% and confirming a bear market last month.
Lured by a dizzying rally in the benchmark indices, which more than doubled since the COVID-19 pandemic until the third quarter of last year, Sahay is among nearly 100 million new investors who took to trading stocks and equity derivatives via low-cost trading platforms.
Sahay invested his 100,000-rupee ($1,150) savings in equities in January 2024, doubling his money by August, which encouraged him to borrow funds for riskier options trading.
When markets tumbled, he suffered losses and borrowed more on hopes of a rebound, trapping him in debt.
“The thing with option trading is that the gains are massive, but I was underprepared to face the loss,” he said.
Sahay and his family have slashed spending to a bare minimum.
Reuters spoke to two dozen retail investors across many major cities, including Mumbai, Chennai and New Delhi. Most, rattled by the sharp fall in markets, said they were considering pausing or cutting their overall spending including reducing investments in markets in the near term.
Puneet Goyal, a 36-year-old from Udaipur in Rajasthan, is delaying plans to buy a house, after the market downturn wiped roughly 14% or 2 million rupees off his portfolio’s peak value. He was hoping to cash out from the markets to make initial payments for the home.
There are also early signs of the market slump impacting auto sales.
Two-wheeler sales fell 9% in February, data from an auto industry body showed, while passenger vehicle dispatches grew a modest 2%, which Nomura analysts partly blamed on weak consumer sentiment from market volatility.
Leading Indian auto dealers’ industry chief C.S. Vigneshwar said the current market turmoil “certainly” affects urban vehicle sales, as “customers also tend to be a little bit more circumspect in terms of spending.”
That could further undermine economic growth as, according to India Brand Equity Foundation, a government-established trust, India’s auto industry contributes around 7.1% to GDP.
DIMINISHING RETAIL INTEREST
An extended market slump risks slowing the steady flow of retail money that has helped cushion losses during foreign investor sell-offs, fund managers said.
Retail and high-net-worth individual (HNI) ownership in all listed companies on India’s National Stock Exchange hit a record 18.2% by December-end, surpassing foreign portfolio investors (FPIs) for the first time since 2006.
But many investors are now rethinking their bets.
“I am thinking whether to pause the investments or continue,” 29-year-old Mansoor Khan, who started investing in 2019, said.
He is considering moving investments to safer assets, such as gold, and pausing Systematic Investment Plans (SIP) – an investment mechanism for India’s retail investors that has drawn a monthly average of $1.8 billion into equity markets over the past four years.
Inflows via SIPs and incremental account additions have slackened recently, analysts at Citi Research and HSBC said, cautioning of more pressure on flows if markets remain sluggish.
Overall net inflows moderated to a 10-month low in February, data showed on Wednesday.
Trading activity has slowed and may decline further.
The number of individual investors participating in the cash market slipped to a nine-month low in January, NSE data showed.
Angel One, India’s largest listed retail broker, reported a 26% month-on-month drop in client acquisitions in February.
Brokers have seen a 30% drop in activity, Nithin Kamath, CEO at the country’s largest online brokerage, said in a post on social media platform X.
If investments don’t perform well over the next year or so, retail participation would drop further, said Ajay Tyagi, head of equity investments at UTI Asset Management, which has around $240 billion in assets under management.
“When there is excitement, investors feel that they can build wealth from stock markets,” he said.
Now that most equity segments are yielding negative or marginal returns, “investors realise that this may not be a quick way of making money every year.”
($1 = 86.9060 Indian rupees)
(Reporting by Bharath Rajeswaran, Vivek Kumar M in Bengaluru; Siddhi Nayak in Mumbai; Additional reporting by Meenakshi Maidas; Writing by Indranil Sarkar; Editing by Ira Dugal and Shri Navaratnam)
