Booming markets: RBI Governor warns stretched valuations pose financial stability risk

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There is a disconnect between booming markets and economic activity, Reserve Bank Governor Shaktikanta Das said on Monday, warning that the stretched valuations of financial assets pose a risk to financial stability.

"The disconnect between certain segments of financial markets and the real economy has been accentuating in recent times, both globally and in India," Das said in his foreword to the bi-annual Financial Stability Report (FSR).

"Stretched valuations of financial assets pose risks to financial stability," he warned.  

The RBI Governor asked banks and financial intermediaries to be cognisant of this risk, given the interconnected nature of the financial system.

After a sharp 40 per cent correction in March last year following the COVID-19 outbreak, the Indian markets have grown by over 80 per cent in a rally which continues. The number of new demat account openings are also at a record high.

Das had made similar comments on the disconnect earlier as well but this is for the first time he is linking it with the broader aspect of financial stability.

The sharp rally in stock markets has come even as the GDP is set to contract by 7.5 per cent this fiscal, as per RBI's estimates, primarily because of the pandemic and resultant lockdowns.

Easy liquidity conditions across the world are said to be the prime reason for the market rally, with overseas investors chasing higher yields.

However, some market participants say the markets are taking a longer term call on the Indian economy, beyond the near-term negative news flows.