RBI Bulletin Raises Questions on Indian Equity Valuations

RBI Bulletin Raises Questions on Indian Equity Valuations

Indian Market
Last Updated: 2022-08-08T18:56:01+05:30

On 16-November, the sharp correction in the stock market was triggered by the concerns over factors like inflation, bond yields etc raising the spectre of the Fed front-ending rate hikes. It was also feared that if the Fed opted to front-end rate hikes, the RBI may be inclined to follow suit.

At Mint Street, the RBI has been expressing concerns about too much liquidity in the system. Its recent measures were aimed at absorbing Rs.50,000 crore liquidity from the bond markets.

It is in this light that the latest salvo came from the RBI bulletin, a monthly publication by the central bank. The November issue of the bulletin raised concerns over equity valuations.

The statement in the bulletin was quite clear. It said, “Reserve Bank of India remains concerned about India’s steep valuations.” Talking of the RBI concern, the statement added, ”The spectacular gains have raised concerns over overstretched valuations with a number of global financial service firms turning cautious on Indian equities".

RBI was obviously referring to international brokers who had downgraded Indian equities.

Over the last couple of months, a number of global banks like Morgan Stanley, Nomura and Citibank have raised concerns over Indian equity valuations. Recently, Goldman Sachs and CLSA also expressed concerns and downgraded Indian equities from “Overweight” to “Neutral”.

Their concern was that the rise in the MSCI India index was exponentially higher than the minor rise in the global indices or even the Asia indices.

RBI’s concern over equity valuations should be seen in the context of its recent measures to soak excess liquidity out of the system. One of the major concerns of the RBI was that the relentless global liquidity had led to most equity markets getting priced upwards.

India had got an inordinate share of the rally, raising real questions about whether the liquidity was really being channelled in the right direction.

The liquidity was an outcome of the measures taken by the RBI and the government to overcome the COVID-19 crisis. That was inevitable.

According to the RBI, the stretched equity valuations did raise questions over whether continued liquidity infusion was really justified or it was only stoking speculative spirits in the Indian market.

The other downside of liquidity that the RBI is worried about is inflation and that is evident in the core inflation figure at above 6% in October.

Equity valuations for the RBI were just an external symptom. The real issue was that the Indian economy was perhaps having to contend with more liquidity that it could really handle.

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