ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles by S S S KumarSubscribe to S S S Kumar

Is There a Bubble in the Indian Stock Market?

The recent surge in stock prices in India sparked off a debate on a possible bubble in the Indian stock market. The attempt here is to detect and date stamp bubbles present, if any, in the Indian stock market using a recursive econometric technique. This technique can help identify bubbles as they emerge, not just after they have exploded. This study does not indicate any explosive price behaviour in the Indian stock market. Thereby, the presence of any bubbles during the study period is not detected. The sharp decline and the subsequent recovery of the stock prices during the past 15 months was most probably an overreaction to the pandemic.

Participatory Note Investments

Investments through participatory notes in the Indian stock market have been a cause for concern for policymakers. It is argued that P-Notes did play a role in attracting foreign investments, when suitable instruments were unavailable in India. But, today, with new liquid contracts available in Indian equity markets, P-Notes serve no purpose other than providing anonymity to foreign investors, and a potential route for tax evasion. From statistical analysis, it was found that P-Note inflows/outflows seem to be determined by rupee -dollar exchange rate movements, and not by fundamental price-to-earnings ratios, or even sentiment indicators like put-call ratio and advances-to-declines ratio. Policymakers must discourage foreign institutional investors from moving to P-Notes to avoid tax, and in the long term P-Notes must be phased out--the first step could be setting caps on investments through P-Notes at the firm level and at an aggregate level as well.
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