<p>The Reserve Bank of India (RBI) on Thursday said the sharp rally in the domestic equity markets despite an estimated 8 per cent contraction in GDP in 2020-21 poses the "risk of a bubble".</p>.<p>In its annual report for 2020-21, RBI noted that India's equity prices have surged to record highs, with the benchmark index Sensex crossing the 50,000 mark on January 21, 2021 to touch a peak of 52,154 on February 15.</p>.<p>This represents a 100.7 per cent increase from the slump just before beginning of the nationwide lockdown (since March 23, 2020) and a 68 per cent rise over the year 2020-21.</p>.<p>"This order of asset price inflation in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble," RBI said.</p>.<p>It also noted that the widening gap between stretched asset prices relative to prospects for recovery in real economic activity has emerged as a global policy concern.</p>.<p>The stock markets are mainly driven by money supply and foreign portfolio investor (FPI) investments, the apex bank said.</p>.<p>Also, economic prospects contribute to movement in the stock market, but the impact is relatively less compared to money supply and FPI, it added.</p>.<p>According to RBI, the liquidity injected to support economic recovery can lead to unintended consequences in the form of inflationary asset prices, thus providing a reason that liquidity support cannot be expected to be unrestrained and indefinite.</p>.<p>It, therefore, suggested that there is a need for calibrated unwinding once the pandemic waves are flattened and real economy is firmly on the recovery path.</p>.<p>The apex bank said the rise in equity prices from 2016 to early 2020 was mainly supported by a drop in interest rates and equity risk premium (ERP) with increase in forward earnings expectations contributing to a lesser extent. </p>
<p>The Reserve Bank of India (RBI) on Thursday said the sharp rally in the domestic equity markets despite an estimated 8 per cent contraction in GDP in 2020-21 poses the "risk of a bubble".</p>.<p>In its annual report for 2020-21, RBI noted that India's equity prices have surged to record highs, with the benchmark index Sensex crossing the 50,000 mark on January 21, 2021 to touch a peak of 52,154 on February 15.</p>.<p>This represents a 100.7 per cent increase from the slump just before beginning of the nationwide lockdown (since March 23, 2020) and a 68 per cent rise over the year 2020-21.</p>.<p>"This order of asset price inflation in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble," RBI said.</p>.<p>It also noted that the widening gap between stretched asset prices relative to prospects for recovery in real economic activity has emerged as a global policy concern.</p>.<p>The stock markets are mainly driven by money supply and foreign portfolio investor (FPI) investments, the apex bank said.</p>.<p>Also, economic prospects contribute to movement in the stock market, but the impact is relatively less compared to money supply and FPI, it added.</p>.<p>According to RBI, the liquidity injected to support economic recovery can lead to unintended consequences in the form of inflationary asset prices, thus providing a reason that liquidity support cannot be expected to be unrestrained and indefinite.</p>.<p>It, therefore, suggested that there is a need for calibrated unwinding once the pandemic waves are flattened and real economy is firmly on the recovery path.</p>.<p>The apex bank said the rise in equity prices from 2016 to early 2020 was mainly supported by a drop in interest rates and equity risk premium (ERP) with increase in forward earnings expectations contributing to a lesser extent. </p>