The Bubble in Stock Market!!

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The Reserve Bank of India recently published its Annual Report for the year 2020-21 wherein it wrote that there is a big bubble in the Indian Stock Market. Sensex and Nifty are at its record high even when the country's economy is facing a severe disruption due to the second wave of Coronavirus pandemic and the RBI has warned that risky assets have shown dramatic rise in their prices even due to many states imposing lockdowns and restricting economic activities in their respective states. However, situations are not as worse as that were in the first wave but the Indian economy is facing depression situation but still the Indian Stock Market is making record highs.

Several indicators like the famous Buffet Indicator which compares the GDP of the country to its benchmark indices of Stock Market showed that the indexes are trading at a very high prices compared to the country's GDP which is still recovering from the pandemic crisis. The historical average of both Nifty and Sensex is 18-20 but now there average is from 37-40 which is very high clearly showing a bubble. The RBI has warned the investors investing in risky assets (Stock Market) to be cautious.

Reasons of the bubble noted by RBI:

  1. The main reason noted by RBI is the stimulus packages announced by several countries for the recovery of their economies gave a boom to stock market as this liquidity is injected to Stock Market in the form of FPI inflows which has led to sharp rise in prices. However these inflows can't be made for indefinite period of time and when the effect of pandemic is nullified the prices of these risky assets will be surely get affected.
  2. Huge amount of printing of money made by The US in this fiscal year led to inflation in asset prices as this money was used for FPI inflows.
  3. Better prospects of the revival of Indian Economy from the pandemic crisis and availability of life saving vaccines created positive sentiments.
  4. Record high FPI Inflows in India and also record high participation of retail investors in the Indian Stock Market.
  5. Uncertainity in the Election results of The US but now this uncertainity has also faded away which initially helped in increase of prices.

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