Stock Market Concerns - RBI Annual Report

Some statistics of stock market for 2020-21 financial year 

1. Sensex surged 77% in 2020-21.   It was 28,265 on 1st of April 2020 & ended at 50,136 on 31st March 2021
2. Peak was reached on 15th February 2021 @ 52,154 
3. 25 Initial Public Offers (IPO's) were issued by corporate's during 2020-21 of which 21 had generated positive returns for investors  
4. Equity market recorded a net inward Foreign Portfolio Investment (FPI) of Rs.2.8 lakh crores during 2020-21 (compared to a net outflow in FPI of Rs.6,024 crores in Previous year)
5. Direct participation of retail investors was the hallmark for the year 2020-21 with 1.43 crore new Demat accounts opened during the year (compared to 50 lakhs in previous year).  Retail holding in NSE listed companies increased to Rs.13.6 lakh crores from Rs.7.2 lakh crores in the previous year 
6. Asset under management of pension funds soared past Rs.5 lakh crores

Desipte covid concerns what are the major cases attributed to this sharp surge in stock market in India. 

The market factored in the following factors for the sharp recovery.   Easing of Covid and consequent expectation of recovery in economy, better performance by corporate's especially during Q3 & Q4 of 2020-21 triggering record GST collections, Rs.1.5 lakh crore Performance Linked Incentives (PLI) for key manufacturing sectors, record high FPI inflows during 2020-21, lower interest rate regime triggered by lowering of repo rates by RBI and global economic recovery to name some of the key factors.

Now for the concern of RBI for this sharp upward swing of stock markets.  The following are the major factors RBI lists in its report under the title "Is the Bubble in Stock Market rational"

1. This order of asset price inflation (77% in 2020-21) in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble. 
2. Results suggest that the stock price index is mainly driven by money supply and FPI investments. Economic prospects also contribute to movement in the stock market, but the impact is relatively less compared to money supply and FPI. This assessment shows that liquidity injected to support economic recovery can lead to unintended consequences in the form of inflationary asset prices and providing a reason that liquidity support cannot be expected to be unrestrained and indefinite

To conclude, meteoric rise in Indian stock market is a cause of concern considering the fact that there is no strong fundamental reason but short term temporary reasons which can reverse any time causing the bubble to burst.  Investors especially retail investors should exercise caution when treading into the market and it is advisable to use a mix of equity and debt to achieve their financial goals