Nirmala Sitharaman explains why economy and stock markets may have been going different ways

Finance minister Nirmala Sitharaman has shared her views with ET on the growing debate over the widening disconnect between stock market performance and economic ground realities.

In an interview, the Finance minister said she was seized of the fact that a growing number of people have come to view this divergence with confusion. She also said that some quarters were concerned because a market collapse at this point can be another pain point for an economy already reeling under the impact of the Covid pandemic.

For the record, the Indian economy has been in tatters ever since the pandemic set in, leading to all-encompassing lockdowns. As of now, jobless rates have continued to remain at alarming levels. GDP has just witnessed its worst trough in decades, with equally dire — if not worse — numbers forecasted for the rest of the financial year. And there is no sign of the pandemic relenting as the virus rushes to claim the last remaining outposts of the economy.

Yet, the stock markets seem to be on an entrenched bull run. And that has given rise to ever newer narratives on this glaring market-economy disconnect.

According to the Finance minister, her views are not a judgment of anyone who thinks that the stock market is divorced from ground realities and is performing in an echo chamber. But the point to note here is the newfound zeal of the Indian retail investor, Sitharaman pointed out, saying that she was impressed with this new breed of investors.

She cited the surge in the opening of demat accounts during the lockdown period to highlight a potential change in investor mentality. Indians are probably dumping the fixed deposit mindset and that could explain why people are opening demat accounts like never before, she said.

According to Sitharaman, the initial explanation in government circles for the demat surge was that people were opening accounts because they were sitting at home during the April-May lockdown. But that view, she said, changed after the lifting of the lockdown.

Even after substantial unlocking, there was no stopping this surge, the Finance minister said quoting bank and financial intermediary data. Nearly 10 lakh demat accounts were opened last month, while the pre-Covid number for the same used to be around 5 to 6 lakh a month, Sitharaman pointed out.

The new-age retail investor has come to realise that one can play the stock market directly, and not through mutual funds alone, Sitharaman said. But can such a sharp rise in popular interest for demat accounts just be a function of people sitting at home with ample time in hand? Hardly, said the Finance minister.

Instead, it was because people had more savings in hand which they wanted to invest in the stock market, she explained. This, according to her, goes on to show that the narrative about stock markets not being connected with ground realities is probably not right.

There does exit a connection, and retail investors coming in such large numbers means something is there, she said. “Some connect is there. It’s worth watching,” the Finance minister averred.

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