Booming stock market and shrinking economy in India, what is the reason?

 The day of 21st January will be written in golden words in the history of Bombay Stock Exchange. For the first time in its 145-year history, the index crossed the psychological level of 50,000 and ended the day marginally lower at 49,624.76.

This is being seen as a big achievement. How important this success is, it can be gauged from the fact that after the nationwide lockdown at the end of March, the Sensex had fallen by 25,638 points. Now the boom is touching the sky.

That is, the index has doubled in 10 months. According to an estimate, in the year 2020, those investing in the stock market made a profit of 15 percent. In such a short span of time, it was impossible to earn such a handsome profit by investing in any other sector.

What are the reasons for this tremendous jump in the stock market in the last 10 months? And how long will this 'feelgood' time continue?


Before throwing light on these two questions, it is important to consider this question that if India's economy has been ruined due to the pandemic, then why has the stock market jumped so much in the last 10 months?


Why the difference between economy and market?

If there is an atmosphere of celebration in Mumbai's Dalal Street, then many people in the country are asking why there is such a disconnect between the economy and the stock market? The answer is not straightforward. But apart from India, similar trends have been seen in America, South Korea and some other economies as well.

This can be called a global trend. Mumbai-based economist Vivek Kaul says that India's economy is going to shrink in this financial year, but the stock markets are booming.

The main reason for this is the excessive liquidity (cash) available in the market.

The Wharton Business School in America is famous all over the world. In one of its daily radio shows, Itay Goldstein, the school's finance professor, gave three reasons for the global trend of disconnect between the stock market and the economy. 

They say that the first, which is true for all times, is that the investors of the stock market are the watchers of the times to come. In general, what you are seeing in the economy right now is going on. That is, the economy sees what is happening at the present time, such as what is happening in the field of production, employment.

According to Professor Goldstein, the second reason is the central bank injecting too much cash into the financial system. He says that all the major economies have given financial packages to deal with the epidemic, due to which cash has come in the market.

Professor Goldstein says that the third reason for this trend is the fact that the companies that are associated with the stock market are not necessarily representative of the entire economy. In support of his argument, he cites the example of companies like Facebook, Google, Amazon and Netflix, which were not negatively affected by the pandemic, but their stock share prices have increased rapidly and these companies do not lead the entire economy.

What are the reasons for the boom in the market?

For the past few months, there has been a 'bull run' in the stock market due to both global and domestic reasons.

According to Prateek Kapoor of Standard Chartered Securities, there have been several packages to fight the pandemic in the US, due to which there is a lot of liquidity in the market.

He explains, “India is one of the safest and most profitable market in the emerging market, so foreign institutional investors (FIIs) are investing in India and doing so rapidly. For a few days in the first week of January, they are out of our market. They started withdrawing money, due to which the market had fallen, but for the last two-three days, they are investing a lot again.

According to Prateek Kapoor, the second reason is the reduction in the interest rate. In his view, the political stability since the end of the election in America and the swearing-in of Joe Biden on Wednesday and some important steps taken by him had a positive effect on the US market, which had a direct impact on India's stock market as well.

In the year 2020, foreign investors made a deal of $ 32 billion in India's stock markets, which is a record for a single year so far.

The year 2019 was also the year of investment of foreign investors and in the year 2021 also the interest of foreign investors will remain in the Indian stock market.

There is an estimate that foreign investment of up to $ 25 to 30 billion can come to India.

Vivek Kaul says that these days the stock market is on the rise due to easily available cash.

He says, "Foreign investors have spent $32 billion buying Indian stocks last year (2020). Many local investors have also bet on stocks following the steep fall in interest rates. But the money has been invested. Due to all this, the stock market is going up, while the economy is expected to decline in this financial year.

The trend of investing in the market is increasing within the country. This is also a reason. According to a report, in the year 2020, the number of young investors in the category of retail investors increased by one crore. Investors taking a long term approach now prefer to invest in stocks and shares instead of keeping money in banks or investing money in real estate.

Will this boom continue?

There is some uncertainty at the moment. Opinions of experts differ. Prateek Kapoor says that the market will go up even more now.

He says, "For now, foreign investors will keep coming. Which Biden's new economic package will also bring color in the market. But in the short term, there may be a correction, that is, there will be volatility in the market in the next few days or weeks and the stocks of some companies will remain volatile. Prices will go down. Correction or a slight fall in the market is not negative. A little correction is needed as the market is overheated.

Reserve Bank of India Governor Shaktikanta Das, emphasizing on financial stability, says that he is concerned that the disconnect between the economy and the market has increased in recent times. It is important to keep an eye on this trend.