Stock Market ‘Crash’ Couldn’t Have Come at Worse Time for India’s Middle Class

Indian households are more deeply involved in stocks and shares than they ever were, writes Aunindyo Chakravarty.

Whatever gains the middle class might have secured from the income tax breaks could well get wiped out by the markets. 

(Photo: Aroop Mishra/The Quint)

Everyone knows that investing in shares is much riskier than keeping your money locked in a fixed deposit or buying a government bond. You can definitely make more money on the stock markets if you stay invested for a long time. However, in the short-run, you can just as easily be wiped out if the markets tank.

This risk is why, historically, most Indians, stayed away from the stock markets, believing it to be the playground of the affluent — those who could absorb short-term losses for the promise of long-term gains.

So why does this ‘correction’ – the euphemism stock marketwallahs use for a crash – feel so different this time?

The answer lies in how much more deeply Indian households are now involved in stocks and shares, more than they ever were.

A Record Number of Indian Families Now Invest in Stocks

Let's start by comparing the numbers.

When COVID hit India five years ago, there were fewer than 4 crore unique demat accounts. Even if one-fourth of these account holders were in the same family, we can say there were 3 crore families who could invest in stocks — roughly 10 percent of Indian households at the time.

Fast forward to now, and we have over 12 crore unique demat accounts. Even if we assume that one-third of these are in the same family, roughly 8 crore families can trade in shares now. That’s 25 percent of all Indian households.

Along with that, there are over 5 crore unique investors in mutual funds, who are indirectly invested in the markets. Even accounting for overlap with demat account holders, it is safe to say that 26-27 percent of Indian families are exposed to the stock markets today.

That is a massive number, considering that 56 percent of Indians need free food to survive, and a majority of households have no real financial savings to put away as investments.

This is why the current stock market collapse affects far more Indian households than any market downturn in the past.

Other than the short, sharp, COVID-induced crash in March 2020, the last time that we saw a major correction in the Indian stock markets was in 2015-16. Back then, the Nifty 50, India’s most hotly tracked index, fell slowly and sedately by about 25 percent over 11 months.

This time, the Nifty has already ‘corrected’ 16 percent from its September peak, within just five months. For context, the 2015-16 decline, mentioned above, had also seen a 16 percent drop in the first five months.

But there's one crucial difference — there were just 2 crore unique demat accounts in India back then, compared to the 12 crore at the end of 2024. So, just 7 percent of families were affected by losses in the stock markets compared to 27 percent now.

Small Investors Bear the Brunt

What is worse is that many small investors have followed social media finfluencers and bought small and midcap stocks — segments where the bloodbath has been even more intense.

The Nifty Midcap 100, for instance, is down 21 percent from its peak in September. The Nifty Smallcap 100 has performed even worse — it has plunged 25 percent since December.

And this could not have come at a worse time for the middle class.

In normal times, savers can take short-term losses, because they have steady incomes, which keep adding to their savings. But today, we are in the midst of a massive economic crisis for the middle class.

On one side, white-collar job opportunities are reducing, and salary increments are low. On the other, the real inflation faced by middle class households, as opposed to the average retail inflation that the government compiles, is at its highest in recent memory. A stock market correction at such a time is disastrous for middle class household finances.

The key question that retail investors are asking is, are we at the end of the drop, or is there more pain in the offing?

One measure analysts track closely is something called the Price-to-Earnings (PE) ratio, which compares a company's share price to its Earnings Per Share (EPS). It tells you how much you have to pay for a company's stock, for each Rs 1 of profit the company delivers. For instance, if a company’s PE is 25, it means you are paying Rs 25 for each Rs 1 that the company is making in net profit.

Obviously, the higher the PE of a company or index is, the more ‘expensive’ it is to invest in. You would buy high PE stocks if you are confident that its profits will grow at a faster pace. But if a company’s profits are likely to decline, you would need to trade at a much lower PE.

Over the past three years, the Nifty has traded at a median PE of 22.7. In September 2024, its PE had risen to 24.3, making it pretty expensive. This would have been worth investing in if Nifty companies had the potential to grow at a high rate. However, even back then, several brokerages and analysts were warning of a general slowdown in earnings, arguing that the profit projections for Nifty companies do not justify such high multiples.

Since then, the Nifty has dropped to a PE of 19.7, the lowest it has been since June 2022, when it was trading at an earnings multiple of 18.9.

Does this suggest that we have ‘bottomed out,’ that the markets are now about to start rising again?

Not necessarily, if analysts are to be believed.

Retail Investors Flee as Uncertainty Rules Market

Several brokerages have ‘downgraded’ their earnings expectations for Nifty companies, and also believe that the index will trade at a lower PE multiple going forward. The brokerage house Nomura, for instance, believes that the Nifty will trade at a ‘forward’ PE of 18.5 by the end of 2025, at an EPS of Rs 1,286. That is less than 1 percent more than where the Nifty closed at the end of 2024.

There are bigger cuts being made to earnings expectations for small and midcap stocks. In the October-December quarter, the net profits of the smallcap index declined compared to the same period in 2023-24. This is why analysts now expect the smallcap index to deliver 10 percent less in earnings in 2025-26, than they had previously estimated.

Between October 2022 to April 2023, when smaller companies were gradually recovering from COVID, the Nifty Smallcap 100 traded at a PE of about 16. Today, even after the massive correction, it is still trading at 25x its earnings. If the smallcap index were to even move to a PE of 20, along with the 10 percent cut in earnings projections, there could be more blood on the streets for smallcap investors.

Chances are that retail investors have already exited the markets in hordes. Nithin Kamath, co-founder of Zerodha, has pointed to the sharp 41 percent drop in the total value of trades down by retail investors in the equity markets. He noted that this is the first time in Zerodha's 15-year history that the firm has seen a degrowth in the business.

Right now, 16 percent of Nifty stocks and 30 percent of the Bombay Stock Exchange (BSE) Smallcap Index have hit their lowest point since March 2024. Typically, these are levels at which investors buy index stocks. But, for now, market watchers are being cautious.

There are far too many uncertainties in the global economic environment – from Donald Trump's tariffs to the impact of Artificial intelligence (AI) – for anyone to take a definitive stance on the immediate future.

So, whatever gains the middle class might have secured from the income tax breaks could well get wiped out by the markets. 

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)