Indian investors choose alternatively between capital markets and banks to park their investments for higher returns and the growth of market capitalisation and bank deposits are inversely related. Funds generally flow from one to another depending on the size of returns, according to a study conducted by brokerage firm SMC Capital.
?When there is fear, bank deposit levels go up and when it is optimistic, the market cap levels go up,” said Jagannadham Thunuguntla, equity head at SMC Capital.
When Sensex was at a peak in January 2007, the BSE market cap as percentage of aggregate bank deposits stood at a level of 152%, showing that the BSE market cap was 1.52 times more than the entire bank deposits.
However, since the beginning of 2008, when the stock markets tumbled, this level of BSE market capitalisation as a percentage of aggregate bank deposits started falling consistently.
The level of BSE market capitalisation as a percentage of aggregate bank deposits once again crossed 100% levels with stock markets showing some signs of recovery since March 2009. Currently, these levels are at about 129%, with Rs 52.85 lakh crore as market cap and Rs 40.81 lakh crore as bank deposits, noted the study.
The relative measure of ?the entire market capitalisation of BSE as a percentage of aggregate bank deposits in the entire banking system? reflects the level of risk appetite in the investor community, Thunuguntla said.
?As the bull market capitalisation kept racing ahead during 2007, these levels of BSE market cap as a percentage of aggregate bank deposits kept rising.”
When the market reached its peak, these levels have reached to the tune of 235%. Thereby, with all the bank deposits available with the scheduled banks of India put together can?t even buy half of the BSE stocks. At this point of time, aggregate bank deposits stood at Rs 30.47 lakh crore, while the BSE market cap was at Rs 71.69 lakh crore.
?This probably is the sign of ?excess optimism? in the capital market,” said Thunuguntla. However, when the market started becoming bearish in 2008, these levels of BSE market cap as a percentage of aggregate bank deposits began to fall.
By the time the markets touched the bottom in February 2009, the level had already fallen to74%, which essentially means that with the aggregate bank deposits available with the banking system one can buy the entire BSE listed stocks and will still be left with 26% of the deposits.
At this point of time, the total BSE market cap stood at Rs 28.62 lakh crore, whereas the aggregate bank deposits were at Rs 38.48 lakh crore, in February 2009.
In this backdrop, it may be the case that the markets may be slowly moving away from being undervalued, relatively speaking in terms of aggregate bank deposits in the system.
