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Equity Market Could Be A Bubble: RBI Annual Report – India

By Aditya Raghunath — The Reserve Bank of India’s (RBI) annual report on Thursday was a mixture of optimism and caution. India’s central bank essentially said that the country’s growth prospects will depend on the speed of recovery from the second wave.

For that to happen, private consumption, as well as investments, need to fire at the same time. “Typically, post-crisis recoveries have been led more by consumption than investment; however, investment-led recoveries can be more sustainable and can also lift consumption in parts by better job creation,” said the report.

Private consumption and investment together account for 85% of the country’s GDP said the report, and for GDP to be self-sustaining, both of them have to grow in tandem.

The report is concerned that the equity market doesn’t reflect the real state of the economy. One of the headlines in the report was ‘Is the Bubble in Stock Markets rational?’. The RBI said there is a mismatch between the stock markets and the real economy. It said, “This order of asset price inflation in the context of the estimated 8% contraction in GDP in 2020-21 poses the risk of a bubble.”

The report added that the impact of the second wave of infections should end in June with some spillover in July. The report said, “This is the most optimistic scenario that can be envisaged at this juncture – it provides a limited window to establish strict pandemic protocols and logistics, ramp up vaccines production and medical supplies, fill gaps in the health infrastructure and build up stocks, especially of vaccines, in preparation for the next wave of infections.”

It added that if the second wave is not contained “losses in terms of lives, employment and output are likely to be adverse and long lasting”.