RBI Governor Shaktikanta Das on Friday said the Indian stock market currently is not in sync with the real economy which will eventually lead to a correction.
Das said, the stock market is extremely buoyant because of over liquidity in the system and the global economy and it’s said definitely disconnected with the real economy. Markets will correct for sure, but we can’t say exactly when the markets will correct.
Das hinted we can expect rate cuts in the future, but after a pause
The Indian Central Bank believes that there is room for an additional rate cut but, due to rising inflation it is unlikely to implement it any time soon, minutes of the central bank’s last monetary policy committee (MPC) meeting suggested. According to the minutes released on Thursday. The central bank officials, including governor Shaktikanta Das, showed evident worry overgrowth. Das highlighted the uncertainty rendered by the stubborn infection curve of the pandemic. Both Patra and executive director MridulSaggar noted that food inflation needs to be closely watched. In fact, Patra termed food inflation as the “real core” instead of the common point that economists make of monetary policy being positioned as the best response to core inflation, which excludes food. “The generalized inflationary pressures across food and CPI excluding food and fuel, in a situation where growth is expected to contract, is a matter of serious concern.
According to a recent Reuters poll, the Indian economy is likely to contract this quarter and next.
How RBI used loan moratorium to provide temporary relief
The EMI moratorium on repayment of term loans means that borrowers will not have to pay their loan EMI installments during such a period as prescribed by the RBI.
The moratorium provided relief to many, especially those who are self-employed, as they would have found it difficult to service their loans like car loans, home loans, etc. due to loss or shortage of income during the nationwide lockdown period from March 25, 2020. Missing an EMI payment would lead to banks taking adverse actions, which can impact one’s credit score negatively.
As per the Statement on Developmental and Regulatory policy of the central bank. The RBI permitted all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (referred to hereafter as “lending institutions”) to allow a moratorium of six months on payment of installments in respect of all term loans outstanding.
While forming the covid-19-related framework, RBI took considered the financial health of banks as well as depositors. covid-19 impacted business badly and they are in unimaginable stress and if they fail it will lead to financial instability. However by saving business, we are also saving millions of jobs, Das said.
government’s measures to provide relief to the real estate sector
Talking about the real estate being one of the worst affected sectors, Das said the Government has announced several measures for the industry.
In the first tranche of 15 announcements for MSME, real estate and power sector under the AtmaNirbhar Bharat mission, Sitharaman said the COVID-19 disruption would be treated as force majeure under Real Estate (Regulation and Development) Act provisions, and registration and project completion timelines would be extended by six months. The government also announced Rs 30,000 crore Special Liquidity Scheme for (NBFCs), Housing Finance Corporations (HJC) and Institutions (MFIs) which now carry a guarantee by the Government of India.
The announcement related to the regulatory aspect of extension of dates under RERA by allowing ‘force majeure’ with the Urban Development Ministry issuing advisories to states and UTs to treat the COVID-19 period as an ‘Act of God’. In terms of actual implementation, fresh project registration certificates can be issued as also, registration and completion dates extended suo moto for up to six months. Relaxation in project timelines under RERA Act will bring in relief to the developers and safeguard the interest of home buyers,
Speaking about stressed banks and a need for a framework, Das said that RBI has increased supervision on banks in the last and-and-a-half years. “regulatory and supervisory measures have been improved drastically. We hope that with improved supervision no bank will need to be saved,” he added.
Is the stock market really overvalued?
Nifty trading between the range of 20-25 is considered expensive and the idle investment decision would be booking 80% profit and wait for better entry levels. Nifty between the range of 25-30 is considered a very expensive and rare event, and the idle investment would be short selling or going against the market. Currently, the PE ratio of Nifty 50 is 32+ which is once in a lifetime situation. We can evidently expect a huge correction any time soon. The idle investment decision would be profit booking, short selling, or staying away from markets if you are new. Currently, some stock might look lucrative and undervalued, but still, we should avoid buying at this point in time because markets will correct for sure and we can get the same stock at a much lower value. Another reason for the market being overvalued is the positive Q1 result, yes it’s true that the results were positive than expected, but still not good enough to justify the value at which the stocks are trading.
How the Robinhood traders are contributing to the overvaluation
From the beginning of April, where the broader market moved higher, dozens of companies with negative equity value, aka penny stocks, moved higher hitting daily circuit filters. Some of them like GTL Infrastructure, JP Associates, Unitech, Reliance Power, Jain Irrigation, Sintex Industries moved higher by 300-500 percent. No wonder market veterans were surprised by the rally in the frontline stocks, but the underlying reason driving the stocks higher can be judged from this strange movement in penny stocks.
What’s more surprising is that this trend of Penny stock buying was also visible in the US and other markets as well. Retail investors (Indian version of Robinhood traders), who was at home during this lockdown, tried to tap the prices higher. It is quite likely that they may also have invested in frontline stocks. However, conspicuously their high interest in penny stocks has been quite visible and frightening. A handful of these penny stocks showed reverse trend and hit lower circuits. It’s time to be cautious!