Stock market rally despite economic contraction shows financial stability risk: SBI Economists

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Mumbai: Market capitalization of listed companies in India grew at the fastest pace last year among major economies despite contraction in GDP, posing risks to financial stability, according to economists from SBI.

It may be noteworthy that the 30-share benchmark index BSE has rallied from 28,000 points in early April 2020, to over 52,000 points at present.

No real economic development

“The rise in the stock market without significant development in the real economy may raise the issue of financial stability which as per our financial stability index shows modest improvement in April 2021, but lower than the peak witnessed in December 2020. However, it is expected to have declined in May 2021,” the economists said in the note.

In the past, the Reserve Bank has also expressed risks of financial stability because of the fast growth in stock markets.

SBI economists attributed the growth in equity markets to lower returns on other financial instruments amid a low rates regime, increase in global liquidity, and even a tendency to spend more time at home because of mobility restrictions which led many to trade more.

Increased retail participation

Also, retail investors have shown higher interest in markets and their numbers have increased by 1.42 crore in FY21 and another 44 lakh in April and May, the note added, wondering if this will be a lasting behavioural change or is transitory.

According to the research note, the 30-share benchmark of BSE grew 1.8 times in the last year, which was the fastest among major economies, beating others like benchmarks in Russia (1.64 times), Brazil (1.60) and China (1.59).

A sector-wise analysis of Nifty-50 reveals that financial services are the clear winners with Rs 157 lakh crore increase in their market cap during the past one year. IT is another major sector whose market value has increased significantly, followed by oil and gas, consumer goods, automobiles, metals and pharma, it said.

From a returns perspective, it said sector-wise one-year return indicates that IT and materials have performed better.

The increasing retail participation, if it becomes the norm, could also enable a larger resource pool for financing India’s infrastructural requirements, the economists said.

They further pointed out that the share of savings in shares and debentures to total household financial savings at 3.4 per cent in FY20 is likely to increase in FY21 to 4.8-5.0 per cent or 0.7 per cent of GDP from 0.4 per cent of GDP in FY20.