The wide gap between the boom in capital markets and the true picture of the economy

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Mumbai, Ta. 12 January 2021, Tuesday

Stating that there is a wide gap between the boom in the markets and the underlying state of the economy, Reserve Bank Governor Shaktikant Das warned that stretched valuations of financial assets could pose a risk to financial stability. The gap between some segments of the financial markets and the real picture of the economy has become striking in India and globally in recent times.

Excessive valuation of financial assets poses risks to financial stability, the governor said in the preamble to the Reserve Bank's biennial Financial Stability Report. It may be mentioned here that the stock markets of the world, including India, have been booming even during the Corona period and the share prices of many companies have gone up in a short span of time.

He advised banks and financial intermediaries to be wary of such risks. He has come up with this suggestion keeping in mind that financial system and markets are interconnected.

The Indian stock market has risen 30 per cent from its lows since the Corona epidemic plunged by 30 per cent in March last year and is still bullish. Despite the rise in stock markets, the state-owned banks in the country's banking sector are currently in a weak position and their gross non-performing assets (NPAs) are expected to increase to 12.50 per cent by September 2021. In the worst case scenario, the proportion could go up to 12.20 per cent.

The governor has issued similar warnings before but this time he has linked the issue of financial stability. In the current financial year, the country's economic growth rate is expected to decline by 7.50 per cent, but the stock markets are seeing a strong rally. The decline is due to the epidemic and the lockdown it has caused.

Stock markets around the world are booming due to easy liquidity. Foreign investors have a strategy of withholding money in markets that yield high yields. Foreign investors invested Rs 1.50 lakh crore in the Indian capital market in 2020.


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