The Indian equity market has witnessed a sharp correction, with the Nifty and Sensex plunging nearly 15% over the past five months. As investor sentiment weakens, economists are raising concerns about its potential impact on household consumption in FY26. The erosion of retail investors’ wealth, coupled with global uncertainties and slowing credit growth, may shift spending patterns, affecting demand across key sectors.
The Market Slump & Its Implications
Economists attribute the downturn to multiple factors, including:
Slowing bank credit growth impacts liquidity and investments
Sustained foreign institutional investor (FII) outflows reducing market stability
Elevated equity valuations compared to global markets, raising concerns about market sustainability
Macroeconomic deceleration leading to a cautious business and consumer outlook
Geopolitical tensions, including the Russia-Ukraine war and Middle East volatility
Aggressive Federal Reserve policies influencing global capital flows
As retail investors experience significant wealth erosion, their spending behavior may shift, particularly affecting discretionary consumption and high-value purchases. Economists warn that prolonged market volatility could dampen economic growth and delay capital expenditures in key industries.
Government Measures: A Counterbalance?
The Indian government has taken fiscal measures to boost disposable income and investor confidence. Finance Minister Nirmala Sitharaman’s Union Budget announcement on February 1 introduced tax reliefs, increasing the tax rebate limit from Rs 7 lakh to Rs 12 lakh, benefiting 1.75 crore taxpayers. With Rs 1 lakh crore of revenue foregone, the move was expected to enhance consumer spending. However, the ongoing market slump has largely overshadowed these efforts, keeping investor sentiment shaky.
Market Experts Weigh In
Sakshi Gupta, Vice President & Principal Economist, HDFC Bank, states:
“The fall in equity markets is a combination of a reaction to the slowdown in the economy and rising global uncertainties and FII withdrawals. If the sharp fall in equity markets continues in the coming months, it could put pressure on consumer wealth and in turn impact consumption in FY26.”
Similarly, Sujit Kumar, Chief Economist at NaBFID, acknowledges the downturn’s impact but highlights its silver lining:
“The market correction could further impact consumption, especially for retail investors, whose wealth has declined sharply in a very short period of time. On the other hand, it also helps separate good enterprises from mediocre ones, thereby enabling efficient capital allocation in the economy.”
Global Uncertainties & Future Outlook
Economists also point out that global factors, including the potential return of Donald Trump’s trade policies, could influence market stability. Lekha Chakraborty, economist at NIPFP, suggests a wait-and-watch approach to avoid premature interventions that might create uncertainty for corporations and financial markets.
Despite the decline in stock prices, Indian equity valuations remain higher than their global counterparts, particularly China. Some experts have even warned of “irrational exuberance” in certain pockets of the market, urging investors to exercise caution.
Conclusion: Temporary Setback or Prolonged Impact?
While market corrections are a natural part of economic cycles, their impact on consumption depends on how long the downturn persists. If market sentiment does not recover soon, we could witness:
Weaker retail spending and delayed big-ticket purchases
Stagnation in domestic growth and slower wage expansion
Increased banking deposits as investors seek safer alternatives
However, economists remain divided on the long-term implications. Some see a temporary slump, while others warn of potential stagnation in demand across key industries. Investors and policymakers will need to monitor the situation closely to determine whether the market finds stability or faces further volatility in FY26.
What’s your take on the current market correction? Do you think it will have a lasting impact on consumption? Share your thoughts in the comments below!
