The share market is probably the only component of the economy that has recovered fully from the Covid induced slowdown. To the consternation of Central Banks the world over, the funds released by monetary easing have fuelled a boom in the stock market; stock prices are on the up and up, the US Dow Jones and S&P 500 are nearing all-time highs and European, Chinese and Japanese stock markets are behaving similarly. Our own Nifty is following suit. Almost all economies are staring at recession, but share prices, which should reflect the true value of corporates, are at record high levels.

The BSE Sensex, which had slumped to 25,981 on 23 March 2020 has risen consistently thereafter, and is now touching 39,000 ~ within striking distance of the all-time high of 42,273. The gain in stock prices during the last five months has been about 50 per cent ~ at a time when the Indian economy has contracted significantly, with our GDP falling by 23.9 per cent in the first quarter.

Noting the disconnect between the stock market and the fundamentals of the economy, the Monetary Policy Committee (MPC) of the RBI observed: “While markets and fundamentals seldom do a tango, a disconnect between the two carry the risks of disruptive market corrections.” The MPC also sounded a warning: “Relatively buoyant global financial markets demonstrate not just a disconnect with underlying economic fundamentals, but also portend financial stability risks, particularly for Emerging Market Economies (of which India is one).”

This is probably for the first time in our history that financial satraps feel concerned about a rising share market. Generally, Finance Ministers and Reserve Bank Governors do their best to prevent the share market from falling. To recapitulate, the tax hikes proposed by Budget 2019, which had led to a continued fall in the Sensex, were reversed within a month. However, the present scenario is entirely different. In addition to a marked recessionary trend, inflation is raising its head and China is acting funny at the border.

It is not difficult to see that easy availability of credit; paucity of productive avenues of investment and speculative tendencies are the cause of rising share prices. After drastically reducing the lending rate, which increased liquidity in the market (and also reduced interest rates on bank deposits), the RBI can only hope for the market to self-correct. The RBI Governor expressed his exasperation at the over-heated stock market, saying: “It (the share market) will certainly witness correction in the future. But when the correction will take place, it is hard to predict.”

The behaviour of stock markets has been remarkably similar the world over; till the end of February 2020, share markets generally ignored the pandemic, thereafter markets went downhill, bottoming near 23 March. However, following stimulus from Governments and intervention of central banks, share prices started rising. Credit facilities, government guarantees and lower interest rates, checked the decline in stock prices. The errant behaviour of the share market has market gurus like Warren Buffet, Charlie Munger and Ray Daleo scratching their heads but the ordinary investor is marching resolutely ahead.

An interesting development is the increase in the number of individual investors in the Indian share market; the monthly average investor addition at the Central Depository Services has gone up to 6.5 lakh in the first quarter of this financial year, from a monthly average of 3 lakh for 2019-20, reversing the trend of poor retail participation, since the scam-hit 1990s. The share market is now seeing a new breed of tech savvy online workfromhome (WFH) investors who are aided by sophisticated systems and apps that allow seamless transactions and avoid brokerages and high broker fees.

After March 2020, the market share of retail investors in the cash segment (Z group) has increased to 68 per cent, from around 50 per cent. Simultaneously, a 20 per cent fall was seen in new investors in mutual funds. It would appear that retail investors are not looking for long-term investment but are trying to make quick money through speculation in day trading, margin trading and futures and options or risky, low-priced/penny stocks. The role of Foreign Portfolio Investors (FPIs), who still dominate in A group (large-cap) shares, in driving up share prices, is also worth mentioning. FPIs have invested huge sums in the Indian markets; aggregate FPI investment, as on 1 September 2020 was Rs 12.91 lakh crore, of which Rs 56,970 crore have come in the current financial year.

The interest of FPIs in the Indian share market is surprising, because the profitability of Indian corporates is one of the lowest in the world; the combined net profit of BSE 500 companies in 2018-19 was US$ 63 billion, which is equivalent to 2.31 per cent of India’s GDP, as against 6.1 per cent of the GDP in the US for the top 500 companies. The present scenario is even worse; profits of a sample 1400 listed companies declined by 35 per cent year-overyear in the first quarter of the current financial year. Initially, FPIs were welcomed by the Government, which thought that foreign money would provide depth to the share market. Slowly, however, FPIs started to play the market. Given their huge financial clout, all efforts to rein in FPIs have invariably failed, like the attempt to hike taxes on their profits. The unfulfilled challenge before our policy makers is to redirect Foreign Portfolio Investment to more productive avenues because a constant increase in share prices, despite a slowing economy has given a speculative tinge to the share market, which is now diverting domestic resources from productive avenues to share trading.

The probability that prices of some shares fluctuate not for any reason other than a design by deep-pocketed promoters and investors to make money may not be a far-fetched one. For example, loan defaulters, many of whom are on the radar of law enforcement agencies, assiduously built up a façade of well running businesses which fooled common investors into parting with their hard-earned money, which was then eaten away by unscrupulous promoters and company managements. Around 84,545 fraud cases ~ involving about Rs 1.85 lakh crore ~ reported by scheduled commercial banks and select FIs during 2019-20 and bad loans of around Rs 13 lakh crore, according to the RBI’s Financial Stability report, show the extent of skulduggery in the Indian financial market. Perhaps, the boom in share prices of pharmaceutical companies and FMCGs in the wake of the pandemic can be explained but the persistent rise in prices of shares of all description defies logic, although the denizens of Dalal Street dismiss all talk of speculative activities and argue that share prices are rising because of an anticipated V shaped recovery of the economy. Upbeat investors are confident of a further fiscal and monetary stimulus by the Government and the Reserve Bank of India and also of continued inflows from FPIs. They hope that the current account surplus would continue, due to lower oil imports, lower gold imports, and reduction in imports from China. The elusive vaccine, if successful, would be an icing on the cake.

Previous instances of meltdown of over-heated share markets suggest that one needs to tread with caution in the highly opaque stock market. Apart from market risks, brokerages are under a cloud after a record number of defaults involving clients’ funds in the last three years, that has prompted the Securities and Exchange Board of India (SEBI) to frame new rules to restrict brokers’ access to clients’ funds and shares. However, the Investor Protection Funds at both NSE (Rs.594.12 crore) and BSE (Rs.727.59 crore) are highly inadequate given the fact that a single default (of Karvy) amounted to Rs.678 crores. Also, in case of broker defaults, NSE compensates investors to a maximum of Rs.25 lakh, while the BSE pays only up to Rs 15 lakh.A canny investor invests in the stock market not to make a killing, but to earn a steady income. A Cassandra may not be welcome at the time when stock markets are headed to the moon and beyond, still caveat emptor may be the best policy for the present. Charles Henry Dow, the founder of the Dow Jones index and the Wall Street Journal, had said way back in the nineteenth century: “The man who begins to speculate in stocks with the intention of making a fortune usually goes broke, whereas the man who trades with a view of getting good interest on his money sometimes gets rich.”