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Disconnect between economy and stock markets: Shaktikanta Das

This disconnect, driven by massive liquidity injected by central banks, was a global phenomenon and not peculiar to India, he said Friday in an interview with news channel CNBC Awaaz.




RESERVE BANK OF INDIA Governor Shaktikanta Das on Friday said there was a clear disconnect between the sharp surge in stock markets and the state of real economy, as surplus global liquidity was driving up asset prices across the world. He expected “definitely a correction ahead” in the stock markets, but said the central bank was prepared to take all steps required to maintain financial stability.

This disconnect, driven by massive liquidity injected by central banks, was a global phenomenon and not peculiar to India, he said Friday in an interview with news channel CNBC Awaaz.

Responding to a query on whether there is a disconnect between markets rising sharply and the state of the real economy, Das said: “Disconnect to hai, jiske bare mein humne MPC resolution mein bhi bahut saaf kaha hai, aur maine kisi speech mein bhi iske baare mein zikar kiya hai, yeh India ke liye peculiar phenomenon nahin hai, yeh saare global economy mein hai, kyunki global liquidity bahut hai jiski wajah se stock market mein bahut badhotri dikhai de rahi hai, aur real economy ke saath definitely disconnected hai. (There is a disconnect and we have spoken about it in our MPC resolution as well as some of my past speeches. This phenomenon is global in nature and not peculiar to India. The massive injection of global liquidity has driven the sharp surge in stock prices, which is definitely disconnected with the real economy),” he said.

“Woh aage jaa ke correction toh zaroor hoga, yeh kab hoga nahin kah sakte, lekin financial sector point of view sey usey hum regularly monitor kar rahe hain aur uska impact financial sector kis tarah se aa sakta hai uske liye steps hum definitely lenge. (There will be a correction in the future, but I can’t say when. But from the financial sector point of view, we are regularly monitoring its impact and will take steps to maintain financial stability),” Das said.

Global central banks have pumped in more than $6 trillion into financial markets and reduced interest rates to near zero to tackle the impact of Covid-29 pandemic on the global economy. The RBI has also been proactive in its liquidity injection and monetary measures — injecting close to Rs 10 lakh crore since March in the markets— since the pandemic hit economic activity across the country.

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He cited the example of the Franklin Templeton debt fund issue, where RBI had to open a Rs 50,000 crore liquidity window for mutual funds as there was a need to step in from a financial sector stability point of view. “I am not saying that when there is a problem in the stock market, the RBI will give liquidity. You should not draw this conclusion. But we are regularly, very closely following market behaviour’s impact on financial sector stability, and we will take whatever steps are necessary (to maintain financial stability),” he stressed.

Das declined to comment on a more specific query on stock market price movement trend and said Securities and Exchange Board of India (SEBI) was better equipped on these matters.

The Monetary Policy Committee of the RBI also discussed the disconnect between the market and the fundamentals. “While markets and fundamentals seldom do a tango, a disconnect between the two carry the risks of disruptive market corrections,” the minutes of the MPC meeting on August 6 released by the RBI on Thursday had said.

“Relatively buoyant global financial markets demonstrate not just a disconnect with underlying economic fundamentals, but also portend financial stability risks, particularly for EMEs (emerging market economies),” the RBI minutes said.

The NSE Nifty index and the BSE Sensex have gained 37 per cent and 35 per cent, respectively, in a rally largely driven by non-institutional investors. After the crash in the last week of March and beginning of April, the Sensex has rallied in June and July and hit the five-month high recently following the gradual reopening of the economy and closed at 38,434.72, a gain of 214 points, on Friday. Foreign portfolio investors have made net investments of Rs 15,300 crore in equities since March 1 this year.

Rating agencies and analysts have forecast a contraction of up to 20 per cent in the GDP growth in the first quarter of 2020-21 due to the lockdown induced by the Covid pandemic.

With the moratorium on loan repayments coming to an end on August 31, Das said the Kamath committee on business loan resolution would submit its recommendations in September first week and the central bank will soon release its final guidelines by September 6. The Kamath committee will look into business loans above Rs 1,500 crore, while retail loan resolution will be taken care of by bank boards.

According to Das, banks can start the process on its own and prepare the resolution plan by the end of this month. In fact, most of the banks have started preparing the loan recast proposal for retail and small loans. “Bank moratorium was a temporary solution to respond to coronavirus lockdown but resolution framework is a permanent solution,” he said. On whether there could be a spike in bad loans after August 31, Das said banks will be able to extend or provide a new moratorium to borrowers under the new plan. “We will win this war against pandemic. I don’t know how much time it will take but we will definitely win this war against Covid.”

On interest rates, RBI Governor said the central bank has policy space and it’s wrong to say that rate cuts are over. The RBI has several conventional and unconventional policy tools which will be used judiciously to ensure its effectiveness, Das said. “Uncertainty is the biggest challenge right now and a lot depends on COVID-19 vaccine. The RBI is closely watching markets to ensure stability and the economy will recover soon after the COVID-19 curve flattens.”

“The RBI formed the resolution framework after taking into consideration financial health of banks as well as depositors. Businesses are in a lot of stress due to COVID-19 and if they fail, it will lead to financial instability. However, if businesses are saved, they will repay loans and save jobs,” he said.

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