A stock market bubble arises when greed far exceeds fear. Today, while people are entering the market, there are still a large number who are fearful.
By Vijay Bhushan
The Reserve Bank of India (RBI) has sounded caution that there is a bubble building up in the stock market, as the gap between real economic growth and stretched asset prices are widening, but the observation may be far fetched and not reflective of the realities of the market in current times. While the RBI may have access to far more information and data on this, and financial markets have witnessed sudden and sharp crashes in the last 40 years at least, this is not the situation today.
A stock market bubble arises when greed far exceeds fear. Today, while people are entering the market, there are still a large number who are fearful. The fear engulfing their minds is what might happen if the country entered the third wave of the COVID19 pandemic, which is expected to be deadlier than the second wave. Therefore, such fearful people would either have sold their shares or decided against investing in the stock markets.
On the other side, if the market falls by another 10-15% it would give people an opportunity to enter the market. The interest rates for debt instruments, which are at an all-time low, are also encouraging people to take risk and buy pure equity or invest in equity MF. Retail investors who have stepped in for the first time over the last one year in the same segment have made better returns than the ones that have invested in bank deposits.
Besides, the Future & Options segment, whose turnover is many times more than the cash market turnover, is extremely robust. In case any entity that has a negative view on the market or any specific stock they can sell blank in this F&O Segment. Consequently, all shares in the F&O segment reflect the perception of the market participants.
Therefore, the chance for a stock market bubble to build is quite thin. It is definitely not for the reasons listed by the RBI in its annual report.
On the contrary, the biggest problem in the financial markets will arise out of credit defaults and knee jerk policy actions taken to address such problems. The decision to write-down the perpetual bonds of Lakshmi Vilas Bank and Yes Bank to zero, is an example of such knee-jerk action. This move by the RBI has completely shaken the confidence of retail investors in perpetual bonds. Today, with defaults at even private co-operative banks, people are anxious about where to park their hard earned savings. It is a request to the RBI to focus on this burning issue.
(Vijay Bhushan is former President of Delhi Stock Exchange. Views expressed are the author’s own.)