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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.
Amidst the overall gloom and pall caused by the pandemic and intensified by the cyclones, the news on the front of the Indian stock market is bringing in much-needed cheer and positivity. For the first time in the Indian equity market history, on 24 May 2021, the market capitalisation touched a significant $3 trillion mark. For the uninitiated, it means that if someone wants to buy out the equity shares of all the companies listed on the Indian market, the price tag was just $3 trillion. However, hardly as the celebrations began, the Reserve Bank of India’s (RBI) annual report for 2020–21 was released, cautioning about a possible bubble in the Indian stock market. According to the report, this order of asset price inflation in the context of the estimated 8 percent contraction in GDP in 2020–21 poses the risk of a bubble.
The assessment by the RBI comes from an econometric analysis employing an autoregressive distributed lag (ARDL) estimation with Sensex as the dependent variable and money supply, foreign portfolio investments (FPIs), and the Organisation for Economic Co-operation and Development (OECD) composite lead indicator as the explanatory variables.
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