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With the corona virus pandemic looming over us, the RBI has warned about a possible bubble in the stock market. It all started back in 2020, where after the pandemic outbreak the stock market crashed and recorded the worst fall since 2009. The lockdown and the diminishing economic activities made it worse, however in the second half of the year things were looking better, the stock markets recovered better than anticipated and touched the record high of all time with BSE's index touching the skyrocketing to 52000 mark. When the troubles seemed to be finally over the second wave of pandemic made it difficult for the economy to sustain, and the RBI sensed a bubble.
Well I'm no finance prodigy, however the RBI has some tangible evidences to support their claims. Because of the pandemic there was a steep cut in the interest rates and the money supply was increased, which means borrowing became easy and businesses can borrow if they need. This means that more banks and investment institutions got an incentive to pour money in equities to get that equity premium. All this while the real economy showed signs of slumps and slowdown with the second wave making it even worse. The economic outlook is ofcourse not in the best shape. Still, the FPIs are pouring money which led to a rise in the Whole Price Index (WPI). On contrary the CPI ( to simplify the inflation rate ) is still somewhere between 4-6% which is a sign of relief but still the fear of a bubble looms over us ! Another point which some market analysts identified is the high value of the PE ratio and the low EPS. This means that the assets are overvalued and this could all lead to a full blown bubble. Another reason behind this high stock prices could be the direct participation of retail investors, with an increase of over 14.3 Million Demat accounts in the FY 2020-21. The RBI has already issued fresh guidelines regarding this threat.
But I still believe in the companies who are guided by strong fundamentals could easily get over this.