RBI warns of the stock market bubble in 2021

RBI warns of the stock market bubble: Should investors be worried?:

The Reserve Bank of India (RBI) recently warned of The Reserve Bank of India (RBI) recently warned in its FY21 annual report of a potential stock market bubble. The central bank’s comment came in the wake of local stock markets, peaking even as the country’s economy was still in turmoil after the second wave of the Covid-19 pandemic.

Anyone who has followed the local stock market in recent months knows that stock markets performed impressively, ignoring the economic turmoil of the second wave.

Despite a brief period of uncertainty in the early stages of the second wave, the benchmarks of the S&P BSE Sensex and NSE Nifty50 began to climb again. On Friday, the Nifty50 closed at a record high, while the Sensex is close to 52,000.

The market’s strong performance contrasts sharply with real economic growth, which suffered from the local stoppages that most states instituted during the second wave. Many economic indicators also suffered during the second wave, although the situation is not as bad as the first.


In the context of financial or economic markets, a bubble generally refers to a situation where the price of a stock, financial asset, asset class, or an entire industry exceeds its fundamental value by a significant margin.

Stock bubbles are often difficult to predict, especially for those who don’t keep up with the day-to-day market.

There are typically five stages to a financial or asset bubble, and understanding each stage is essential to avoiding wealth erosion. The five steps are movement, excitement, euphoria, profit-taking, and panic.

Simply put, the bubble is created based on speculative optimism or demand, not the real or fundamental value of the financial asset. When the bubble bursts, it leads to massive sales and prices drop quickly.

The 2008 housing bubble, which led to a severe global recession, is one of the biggest examples, although there have been smaller cases in the past.

A stock market bubble often leads to overpriced stock prices that are often much higher than your company’s core value, including earnings and assets. The bubble can affect the stock market in general, exchange-traded funds (ETFs), or stocks in a particular sector.


According to the Reserve Bank of India (RBI), risky asset prices have increased in many countries and peaked in the period 2020-21 due to unprecedented levels of monetary and fiscal stimulus.

The central bank said the shift in market sentiment “following positive news about vaccine development and access and the end of uncertainty over US election results” was a key factor in the rise in world stocks.

“However, the growing gap between tense asset prices and the prospects for a recovery in real economic activity has become a matter of global policy,” added the RBI.

It can be seen that the BSE Sensex increased 68% to 49,509 in the period 2020-21, while the Nifty 50 increased 70.9% to 14,691 on March 31, 2021.

Indian stock prices continued to rise, with the Sensex benchmark climbing 50,000 in January earlier this year. And on Feb. 15, Sensex peaked at 52,154, a 100.7 percent increase since the drop just before the national blockade began on March 23, 2020.


The central bank highlighted that the amount of liquidity injected to aid the global economic recovery could have “undesirable consequences” in the form of inflationary asset prices.

“One reason why unrestricted and unrestricted liquidity support cannot be expected and calibrated progress is needed are because the pandemic waves are stable   and the real economy is on the path to recovery,” he said. the RBI

“Even taking into account the above expectations for the company’s growth, share prices cannot be explained by fundamentals alone. Current valuations are supported, as in the past, by better corporate results. This part of Sensex’s march can be seen as a rational trend, “added the central bank.

The RBI noted that a deviation from the true P/E ratio shows that the index is overvalued, while dividend yields also indicate that the potential market has no market for stocks in its annual FY21 ratio. The central bank’s commentary is about local and electronic stock markets, even as the country’s economy has been in turmoil after the second Covid-19 pandemic.

Translate »