The financial turmoil of 2008 and the subsequent recession amplified the association between vulnerabilities in the financial markets and the real economy. Examining the behavioural responses of Indian households to financial stress, this article finds that rising financial stress raises household pessimism about the economy – more substantially affecting current perceptions than future outlooks. Further, the impact varies by demographic characteristics such as income and education. 

The 2008 Global Financial Crisis and subsequent recession augmented the significance of the interlinkages between financial market vulnerabilities and the real economy. Academic research often uses the financial stress index (FSI) as a proxy to measure financial stress in the economy (Ghosh 2022, Park and Mercado 2014). This index is based on stress in four major sectors of the economy: banking, equity, debt, and foreign exchange. Evidence suggests that heightened periods of financial stress can lead to a decline in real output, along with disruptions in the labour market, leading to recessionary trends (Wang and Su 2024). In a recent study, Ahir et al. (2023) examine data for 110 countries from 1967 to 2018 and show that heightened financial stress leads to reduced economic growth, and this impact is more pronounced in emerging economies than developed ones. In the Indian context, Sahoo (2021) demonstrates that financial stress adversely impacts economic growth but has no significant effect on inflation.

However, little is known about households' behavioural responses to such shocks. Our recent study (Rooj et al. 2025) explores the response of household consumer confidence to financial stress based on novel survey-based data released by the Reserve Bank of India (RBI).

Consumer confidence and financial stress

Consumer confidence is often viewed as a forward-looking process of the aggregate economy (Acemoglu and Scott 1994, Ludvigson 2004). On the other hand, financial stress indices signal the financial system's health (Hollo et al. 2012, Misina and Tkacz 2009). Each component of the financial stress index can have substantial implications on consumer confidence. For instance, rising stress in the banking sector can create uncertainty in the financial system, reducing credit availability and making consumers more cautious about spending and investing – potentially causing a decline in consumer confidence in banks (Tng and Kwek 2015). Furthermore, equity market returns and volatility can influence such sentiments (Karnizova and Khan 2015); this can be explained by the wealth effects of stock prices on households¹ (Ampudia et al. 2016). Similarly, elevated stress in the foreign exchange market, marked by local currency devaluation and dwindling reserves, can increase inflation and borrowing costs, lowering household confidence and curtailing spending, which may hinder economic growth. Additionally, a widening debt spread tightens credit availability, making consumers more cautious and affecting their economic confidence.

Figure 1 shows the time-series plot of aggregate consumer confidence and India’s FSI. It reveals that financial stress negatively correlates with the CSI, with a more pronounced association vis-à-vis FEI. CSI captures households’ perception about the current economic situation of the country, while FEI reflects their outlook for the next 12 months.

However, such co-movements do not imply any causal role of financial stress on household economic sentiment. Hence, we explore such a relationship using the city-level survey data on consumer sentiments by RBI. This geographically distributed data allow us to estimate the effect of financial stress on households' perceptions and expectations on general economic conditions. Furthermore, such data at the household-level also makes it possible to examine the varied effect of financial stress on household sentiments across various demographic aspects. 

Figure 1. Time-series plot of CSI and FEI and Financial Stress Index (LFSI)

Notes: (i) This figure plots the time series observations of the Current Situation Index (CSI) and Future Expectation Index (FEI), which exhibit the household-level consumer sentiment estimates from the Consumer Confidence Survey dataset released by the RBI. (ii) LFSI is a composite measure of the Financial Stress Index for India at a one-month lag. Data comes from the Asia Regional Integration Center, Tracking Asian Integration of the Asian Development Bank Institute.

Evidence on the effects of financial stress from India

The Consumer Confidence Survey (CCS) by the RBI captures household-level data across 19 Indian cities bi-monthly, from roughly 5,000 households in each round. The survey contains information on households’ opinions about the general economic conditions during the survey period compared to a year ago, and their expectations about the general economic conditions a year ahead. The survey also records respondents’ demographic characteristics such as gender, age, number of family members, number of earning members, income, occupation, and education. Further, it incorporates households’ perceptions and outlooks about their own household income, spending on essentials and non-essentials, employment, and general price levels. Our sample period is from March 2015 (round 23) to July 2023 (round 73).

Our empirical analysis reveals that a one-unit rise in financial stress leads to a reduction in respondents’ perception of their current economic condition by 3.6%, and a decline in their economic outlook by 1.4%. This indicate that rising financial stress raises household pessimism about the economy, more substantially affecting current perceptions than future outlooks. Households perceive the rise in financial stress to have a larger short-term than long-term impact.

Heterogenous impact of financial stress

We further find that financial stress negatively impacts perception of general economic conditions across all income categories, with the highest magnitude for the high-income groups. However, for outlook, such an effect is limited to lower-income categories only, indicating the higher sensitivity of financial stress for the higher-income groups as they are likely to have greater exposure to financial markets (Rampal and Biswas 2022). Similarly, we observe that, with increased education, respondents become more sensitive to financial stress in terms of current economic perceptions, with no effect on future outlook. This aligns with the findings pertaining to income, as high education and income groups are likely to have better access to financial products, which makes them more sensitive to increases in financial stress.

Impact on households’ own economic conditions

Apart from overall economic conditions, financial stress also dampens households’ sentiment about their income and spending, particularly for non-essential, durable spending. A larger impact on non-essentials may be because heightened financial stress negatively impacts credit availability and household spending – especially for those goods for which credit is a strong component, such as consumer durables. However, we find only a moderate effect of FSI on unemployment. Overall, financial stress has a broader impact on households’ own economic perceptions and outlook.

Components of financial stress

The different components of FSI negatively and statistically significantly impact both households’ perceptions and future expectations. However, the highest impact comes from exchange markets, followed by debt market stress. This could be because the stress in the foreign market captures currency crises, such as substantial domestic currency devaluations, decline in foreign exchange reserves, and defensive interest rate hikes, which can impact personal income, equity returns, and consumer confidence (Sun and Kim 2018).

Besides, a steady devaluation might also trigger elevated inflation rates, making consumers illogical, emotional, and more prone to impulsive spending (Negm 2023). Widening debt spreads indicate greater uncertainty and loss of confidence (Park and Mercado 2014). It can also indicate the rising cost of credit, negatively impacting investment and the overall economy. The study results, therefore, imply that Indian households may be more concerned about broader macroeconomic risks, such as currency depreciation and rising debt costs, than fluctuations in stock prices.

Need for targeted interventions

Our research has significant implications for policymakers and financial regulators. The findings reveal the dampening impact of financial stress on household confidence. Therefore, prudent policy measures to enhance financial stability can significantly improve household confidence, stimulating economic activity. This heterogeneity in the impact of financial stress on household confidence emphasises the need for targeted interventions based on socioeconomic demographics. For instance, wealthier households – more sensitive to fluctuations in the foreign exchange market and equity market volatility – may benefit from policies that address stability in sectors such as real estate, gold, and financial services, where these households are heavily invested. Tailored instruments in these areas could buffer against financial stress, preserving consumption patterns and boosting confidence across all income levels.

In addition, the disaggregated impact of financial stress highlights that Indian households are more vulnerable to foreign exchange risks and debt-related issues than to equity market volatility. Thus, policy measures promoting macroeconomic stability, such as maintaining a stable currency and controlling inflation, are particularly important for managing household confidence. Targeted interventions in debt management, credit accessibility, and foreign exchange regulation can offer critical support to households – especially those with higher debt or international exposure. Such a focused approach, therefore, can effectively mitigate the adverse effects of financial stress on households’ economic behaviour.

Note:

1. When stock prices rise, household feel wealthier, leading to increased spending. On the other hand, when stock prices fall, households tend to spend less

Further Reading

• Acemoglu, Daron and Andrew Scott (1994.), “Consumer Confidence and Rational Expectations: Are Agents’ Beliefs Consistent with the Theory?”, The Economic Journal, 104(422): 1-19.
• Ahir, H, G Dell’Ariccia, D Furceri, C Papageorgiou and H Qi (2023), ‘Financial Stress and Economic Activity: Evidence from a New Worldwide Index’, IMF Working Paper No. 2023/217.
• Ampudia, Miguel, Has van Vlokhoven and Dawid Żochowski (2016), “Financial fragility of euro area households”, Journal of Financial Stability, 27: 250-262.
• Cardarelli, Roberto, Selim Elekdag and Subir Lall (2011), “Financial stress and economic contractions”, Journal of Financial Stability, 7(2): 78-97.
• Chen, Wang, Shigeyuki Hamori and Takuji Kinkyo (2019), “Complexity of financial stress spillovers: Asymmetry and interaction effects of institutional quality and foreign bank ownership”, North American Journal of Economics and Finance, 48: 567-581.
• Evgenidis, Anastasios and Athanasios Tsagkanos (2017), “Asymmetric effects of the international transmission of US financial stress. A threshold-VAR approach”, International Review of Financial Analysis, 51: 69-81.
• Ghosh, Sudeshna (2022), “The impact of economic uncertainty and financial stress on consumer confidence: the case of Japan”, Journal of Asian Business and Economic Studies, 29(1): 50-65.
• Hollo, D, M Kremer and M Lo Duca (2012), ‘CISS - A Composite Indicator of Systemic Stress in the Financial System’, Working Paper Series No. 1426.
• Karnizova, Lilia and Hashmat Khan (2015), “The stock market and the consumer confidence channel: evidence from Canada”, Empirical Economics, 49(2): 551-573.
• Ludvigson, Sydney C (2004), “Consumer Confidence and Consumer Spending”, Journal of Economic Perspectives, 18(2): 29-50.
• Misina, Miroslav and Greg Tkacz (2009), “Credit, Asset Prices, and Financial Stress”, International Journal of Central Banking, 5(4): 95-122.
• Negm, Eiman Medhat (2023), “Consumers' purchase behavior reactions: a focus on the steady devaluation of currency, compounding increase in inflation rates in Egypt”, Journal of Humanities and Applied Social Sciences, 5(5): 383-401.
• Park, Cyn-Young and Rogelio V Mercado (2014) “Determinants of financial stress in emerging market economies”, Journal of Banking and Finance, 45(1): 199-224.
• Rampal, Priya and Shreya Biswas (2022), “Socioeconomic Determinants of Household Investment Portfolio in India”, Journal of Emerging Market Finance, 21(3).
• Rooj, Debasis, Reshmi Sengupta and Anurag Banerjee (2025), “The impact of financial stress on consumer confidence: evidence from survey data”, Journal of Asian Business and Economic Studies.
• Sahoo, Jayantee (2021), “Financial stress index, growth and price stability in India: some recent evidence”, Transnational Corporations Review, 13(2): 222-236.
• Sun, Wei and Gil Kim (2018), “Assessing the effects of exchange rate depreciation on the US economy: Evidence from a factor-augmented VAR model”, Journal of Economic Studies, 45(6): 1242-1271.
• Tng, Boon Hwa and Kian Teng Kwek (2015), “Financial stress, economic activity and monetary policy in the ASEAN-5 economies”, Applied Economics, 47(48).
• Wang, Yi-Chia and Hong-Lin Su (2024), “Unraveling exogenous shocks, financial stress and US economic performance”, Studies in Economics and Finance.
• Wu, Baohui, Feng Min and Fenghua Wen (2023), “The stress contagion among financial markets and its determinants”, European Journal of Finance, 29(11): 1267-1302.