Rally in domestic stocks despite contraction in FY21 GDP poses the risk of a bubble:RBI
Published On: Thursday, May 27, 2021 | By: Team KnowMyStock
The rally in domestic stocks despite an estimated 8 percent contraction in FY21 GDP poses the risk of a bubble, according to a RBI study. RBI in a study “Is the Bubble in Stock Markets Rational?”, said the widening gap between stretched asset prices relative to prospects for recovery in real economic activity has emerged as a global policy concern while suggesting the need to consider a calibrated unwinding of stimulus once the pandemic waves are flattened and the real economy is firmly on a recovery path. The BSE Sensex hit a record high of 52,154 on February 15, which represented a 100.70 percent surge over March 23, 2020 levels. The index is hovering at 51,000-odd levels in Thursday's trade. “This order of asset price inflation in the context of the estimated 8 percent contraction in GDP in 2020-21 poses the risk of a bubble," it said.
RBI said liquidity injected to support economic recovery can lead to unintended consequences in the form of inflationary asset prices and, thus, noted that liquidity support cannot be expected to remain unrestrained and indefinite.
The apex bank concluded that the markets are driven by money supply and FPI investments. Economic prospects also contribute to movement in the stock market, but the impact is relatively less compared with money supply and FPI, it said.
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