Indian stock market -A bubble ready to burst?

The equity market is undergoing a very delicate and sensitive phase. Recently, RBI has signaled that there may arise the delicate situation of ‘bubble’ in the equity market.

RBI maintained that the absurd combination of plummeting GDP growth and surging prices of stock markets may put investors in perilous situations. Though this is not something that could not be foresighted in advance, many hints were already been present in the past analysis.

The buoyancy stems from the expectations in normalization of pandemic-driven situations like flattened curve, ease of lock-down, etc. As the stock market is nothing but the behavior of people, so the hope and expectations of people, reflected themselves in the stock markets in the form of soaring index prices.

A word of caution

Though, RBI signaled about the perilous and sensitive situations that may arise from these equations. But people might not pay heed to these important messages. Many of the people invested in the stock markets are first-time investors as can be observed from the increment in the number of opening up of de-mat accounts a past week. It is not that, only lower strata have been affected, as a consequence of pandemic, but the middle class has also experienced a decline by about 32 million i.e., diminished from the pre-pandemic estimates of 99 million to 66 million (as per the study by the US-based Pew Research Center).

So, to maintain the status- quo, the middle -class are needed to explore the opportunities. Amidst lock-down, when all or most of the employment opportunities are being curtailed, investing in stocks seems to be a viable option. Consequently, stock markets surged so high, a few days back. But such situations might lead to serious repercussions for the economy as a whole.

Middle class and stock markets

Indian people mostly rely on the banking sector for their investments as they are more secure. People invest money in banks and other such financial institutions, so as to get assured money. It is, therefore, not uncommon to find that some public sector banks keep revising their interest rates so as to attract customers.

Pandemic has altered this very situation and shafted the investments from the public domain to the private domain. Ostensibly, quite an encouraging step for an economy. But it rests upon the premises of normality. When such huge investments are made in the stock markets amidst pandemic, it is normally an act of exaltation. Moreover, the Indian stock market is highly influenced by foreign investors. This keeps the Indian stock markets highly vulnerable and thereby, makes the invested money in the stock markets, highly vulnerable too. $15.07 billion investment income was taken back home by the foreign investors during October-December 2020.

This situation is precarious as middle class plays very important role in the Indian economy. Middle class helps immensely in fostering the private consumption and saving. The private consumption forms about 60% of the GDP.

What’s the way out?

Stock is not a gamble, but it is indeed a risky venture. Investing in stock markets should be preceded by careful planning and analysis. Investment in such amount amidst the pandemic is not something that we should cheer about. Financial institutions like SEBI should be concerned about this development.

Now, people have invested in the stocks, and efforts should be executed not to let the people driven out money haphazardly. Let this situation be the harbinger of the developments, whereby, the indigenous people investment in the stock market rise to a subsequent level. Let’s make the situation a ‘blessing in disguise’.

About the author

vipal

My name is Vipal Bhagat, going to be doctorate in applied economics. My aim is to analyse and interpret the current economic happenings around us, according to the core and basic principles of economics.

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