India’s historic stock market boom is worrying its central bank

Walking into a trap?
Walking into a trap?
Image: REUTERS/Punit Paranjpe
We may earn a commission from links on this page.

Indian stock markets are so out of tune with the real economy that the country’s central bank is now anxious.

On Jan. 11, the Reserve Bank of India (RBI) said, “the disconnect” between how the economy is fairing and how the stock markets are performing has accentuated in recent times and now “pose risks to financial stability” of the country. The observation was part of the RBI’s annual financial stability report (pdf).

The Indian economy and stock markets have been moving in opposite directions for several months now. At a time when India going through its worst economic phase in recent history due to the coronavirus pandemic, the stock markets in the country have been touching new highs every other day.

After the worst-ever sell-off in March last year, India’s benchmark indices Nifty and Sensex have staged a remarkable recovery. The Indian stock markets have given a whopping 80% return since March.

With the returns on financial assets like US treasury bills extremely low, foreign capital is moving into emerging markets like India. Foreign investors are driving Indian stock markets to new highs. Foreign players poured a staggering net investment of $23.4 billion in India’s equity markets. Even domestic individual investors have joined the frenzy in hopes of faster-than-expected economic recovery and disbursement of the vaccine.

Meanwhile, according to the Indian government’s estimates, the economy is set to contract by 7.7% in this financial year. This will be the Indian economy’s worst performance in more than four decades. In fact, with two consecutive quarters of drops in GDP, India is currently in a technical recession.