Markets

Economy & Markets | 16 Mar 1800-1930

Financial markets are a vital component of any functioning economy and India is home to some of the most vibrant financial markets globally. Based on total market capitalisation, 2 out of the 10 biggest stock exchanges come from India. Our financial markets are a visible indicator of our economic strength and financial stability. Since the operational robustness of financial markets is directly related to the functioning of the economy, financial markets can be labelled as a matter of national importance. Therefore, it becomes necessary to discuss in detail what are the issues that financial markets in India face to ensure that the functioning of the economy is not disrupted and common investors’ interests are not hurt. In this panel on Economy and Markets, we aim to analyse what are the major concerns of India’s financial markets and what are the solutions.

Markets and Economy: Broad Contours

The pandemic in 2020 caused one of the biggest crashes in the Indian stock markets since the 2008 financial crisis. But since then the markets have resumed their upward journey with the major indices making record highs. The question that needs to be asked here is if there is a disconnect between the performance of the markets and the real state of the economy. The reduced interest rate regimes across the world have brought trillions of dollars into circulation and ultimately this money has found its way into the debt, capital and equity markets. There is a need to discuss if the rush in liquidity has masked some of the more important underlying concerns for our economy. This rise in liquidity has also been accompanied by a record number of retail Demat accounts opening. While there is no doubt that increased retail participation democratises the market, but there is a need for the regulators to be vigilant so that newer investors in the market do not face setbacks..

Another issue is related to the introduction of certain big-ticket IPOs that were launched in this bull market. With increased retail participation there is also the risk of investors making financial decisions that might not be sound, this became visible in the scenario with some of the major IPOs leading to huge losses for their investors after the listing day. There was substantial retail participation in these IPOs ultimately leading to losses for the investors. There are some questions that we need to be asking. Are there enough safeguards so that retail investors are not lured into investing in companies with inflated valuations? and is there a scope for regulatory measures to look into at what pricing IPOs are launched, so there can be some semblance of rationality for newer investors?

However, it remains a fact that all financial markets are as strong as the institutions backing them. Stock exchanges have played a major role in the growth of the economy and they continue to do so every day. The issue of governance in stock exchanges garners paramount importance.

Broad Discussion Areas:

• Is there a disconnect between the stock market and the real state of our economy, if so how can
  this difference be explained?
• Some recent big IPOs have seen investor wealth erode quickly. Can there be some interventions
  to ensure IPOs are fairly priced or should it be left to the market to decide fair value?
• There has been a massive influx of retail investors in the market since 2020, are there adequate
  safeguards to make sure that these small investors are protected?