Equity market correction may weigh on consumption in FY26: Economists

The market volatility is attributed to a combination of factors, including macroeconomic deceleration

The sharp correction in the Indian equity markets, with the Nifty and Sensex plunging nearly 15 percent over the past five months, is stoking concerns about its potential impact on consumption in FY26.

As retail investors witness significant wealth erosion, economists warn that prolonged market volatility, coupled with capital expenditure delays and global uncertainties, could dampen economic growth and household spending.

“The correction in the equity market has been a combination of a reaction to a slowdown in the economy and rising global uncertainties and FII (foreign institutional investor) outflows. If the equity market continues to see a sharp fall over the coming months, this could act as a drag on consumer wealth, and, in turn, consumption over FY26,” said Sakshi Gupta, Vice President & Principal Economist, HDFC Bank.

Finance Minister Nirmala Sitharaman had announced income-tax relief in the Union Budget on February 1, offering substantial benefits to retail investors and taxpayers.

The tax rebate income limit was raised to Rs 12 lakh from Rs 7 lakh a year, with an estimated Rs 1 lakh crore of revenue foregone, benefiting 1.75 crore taxpayers. However, the continued market slump has overshadowed these fiscal measures, as investor confidence remains shaky.

“Markets have come off their recent highs significantly as global uncertainties weigh on earnings prospects. The Indian economy has noted slower growth due to consumption weakness and idiosyncratic factors delaying capex early this year. Market correction could further affect consumption, especially for retail investors who have seen a significant erosion of wealth in a short time. On the other hand, it also helps with segregating great enterprises from mediocre ones, thereby enabling efficient capital allocation in the economy,” said Sujit Kumar, Chief Economist at the National Bank for Financing Infrastructure and Development (NaBFID), a development finance institution that supports India's infrastructure sector.

The market volatility is attributed to a combination of factors, including macroeconomic deceleration, muted corporate earnings, geopolitical tensions, such as the Russia-Ukraine war, volatility in the Middle East, and aggressive Federal Reserve policies. Additionally, concerns over a potential reciprocal tariff policy under US President Donald Trump’s influence have added to global economic uncertainties.

“The economic impact is merely cyclical, attributed to the Trump effect, with no prolonged structural implications. However, any premature RBI (Reserve Bank of India) intervention may create false hope among corporates, prompting them to increase dollar exposure. The optimal approach is to adopt a wait-and-watch stance, allowing the market to self-correct and settle into its natural equilibrium. For foreign trade and investment, we can formulate strategies only after April 2, if Trump goes on a retaliatory tariff mode,” said Lekha Chakraborty, Economist at the National Institute of Public Finance and Policy (NIPFP).

Despite the sharp decline in stock prices, Indian equity valuations remain elevated, compared to their Chinese counterparts, with some experts warning of “irrational exuberance” in pockets of the market. Concerns over slowing bank credit growth, rising temperatures impacting productivity, and sustained FII outflows further add to the cautious outlook for equities.

“In Shakespearean language, ‘Ides of March’ is associated with misfortune and doom, but it may not necessarily signal the end of optimism about the Indian economy. The stock market fall could, however, lead to stagnating domestic growth, subdued capacity expansion, and slower wage growth. A silver lining could be a rise in banking system deposits as investors seek safer avenues,” said Manoranjan Sharma, Chief Economist at Infomerics Valuation & Rating Ltd.

While experts differ on the long-term implications of the market downturn, the immediate concern of its impact on consumption remains. As investor sentiment weakens, household spending patterns could shift, affecting demand across key sectors in FY26.