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Suppose if i have setup Magento 2.3.2 with default luma theme and created 40 around multiwebsite setup, Can it slow down the performance of Magento2?

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Yes. It will slow down which means you will need to allocate more resource.

Indexing will be affected.

The nature of EAV means that in some tables you are multiplying the amount of data in the base store by the number of stores.

M2 is certainly much more scalable than M1 but I recommend that you slowly add additional stores in stages to give you a better idea on how much resource you need and how certain areas will perform.

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