By Vijay Bhushan
The Reserve Bank of India (RBI) has sounded caution that there is a bubble creating up in the stock industry, as the gap involving genuine financial development and stretched asset costs are widening, but the observation might be far fetched and not reflective of the realities of the industry in present instances. While the RBI might have access to far more information and facts and information on this, and monetary markets have witnessed sudden and sharp crashes in the last 40 years at least, this is not the scenario today.
A stock industry bubble arises when greed far exceeds worry. Today, though folks are getting into the industry, there are nevertheless a massive quantity who are fearful. The worry engulfing their minds is what could take place if the nation entered the third wave of the COVID19 pandemic, which is anticipated to be deadlier than the second wave. Therefore, such fearful folks would either have sold their shares or decided against investing in the stock markets.
On the other side, if the industry falls by a different 10-15% it would give folks an chance to enter the industry. The interest prices for debt instruments, which are at an all-time low, are also encouraging folks to take threat and get pure equity or invest in equity MF. Retail investors who have stepped in for the 1st time more than the last one year in the very same segment have made superior returns than the ones that have invested in bank deposits.
Besides, the Future & Options segment, whose turnover is quite a few instances more than the money industry turnover, is very robust. In case any entity that has a adverse view on the industry or any certain stock they can sell blank in this F&O Segment. Consequently, all shares in the F&O segment reflect the perception of the industry participants.
Therefore, the likelihood for a stock industry bubble to develop is rather thin. It is undoubtedly not for the causes listed by the RBI in its annual report.
On the contrary, the largest difficulty in the monetary markets will arise out of credit defaults and knee jerk policy actions taken to address such complications. The choice to create-down the perpetual bonds of Lakshmi Vilas Bank and Yes Bank to zero, is an instance of such knee-jerk action. This move by the RBI has entirely shaken the self-assurance of retail investors in perpetual bonds. Today, with defaults at even private co-operative banks, folks are anxious about exactly where to park their tough earned savings. It is a request to the RBI to focus on this burning challenge.
(Vijay Bhushan was former President of Delhi Stock Exchange. Views expressed are the author’s personal.)