- Chief Economic Advisors recently elaborated on the concept of Excessive financialisation, characterised by the dominance of financial markets in public policy, which poses significant risks to macroeconomic stability.
- India’s stock market capitalisation currently stands at approximately 140% of GDP, a level that demands scrutiny.
- High market capitalization and record profitability in the financial sector can lead to potential issues such as increased public and private debt, economic growth heavily dependent on asset-price inflation, and widening inequality.
- These risks have been observed in advanced economies, and India needs to be vigilant to avoid similar outcomes.
- While the current growth in India’s capital markets has been positive, it is important to remain cautious and avoid the pitfalls associated with excessive financialisation.
- The focus should be on ensuring that financial growth contributes to overall economic stability and prosperity, rather than creating vulnerabilities that could undermine long-term development.
| Market Efficiency • Despite technological advancements and faster information flow, recent trends indicate markets are becoming less efficient. • The value spread, or the gap between overvalued and undervalued stocks, has widened significantly. • Investors are increasingly overpaying for popular stocks while neglecting others, leading to price distortions. • Social media and the rise of passive index investing are key factors driving this inefficiency, as investors often follow similar opinions, inflating certain stocks while undervaluing others. |
Dig Deeper: Figure out the reasons behind the consistent Bull market in Indian Stock Exchanges.
