Chief Economic Adviser Arvind Subramanian said on Tuesday that elevated share prices are a matter of concern and could decline sharply if not backed by economic growth, PTI reported. The chief economic adviser called for “heightened vigilance” from investors.
The Economic Survey for 2017-’18 has predicted that the Gross Domestic Product growth rate will decline to 6.75% this financial year from 7.1% in 2016-’17.
Subramanian said that the price-earnings ratio of the Indian and United States stock markets had followed a similar path over the past two years. Price-earnings ratio is the ratio of the price of a stock divided by earnings per share. It is used in the valuation of companies.
The chief economic adviser said the price-earnings ratio in the Indian and US stock markets had converged despite the countries’ economies following different paths. Since December 2005, the Sensex has surged 46% in rupee terms and 52% in dollar terms, similar to the growth in the US stock market.
However, on Tuesday, the BSE Sensex closed over 249 points lower, and the Nifty 80.75 points down.
Subramanian said India’s stock market boom was different in three ways from that in the US – it happened during a period of decelerating growth, high interest rates and increasing allocation of portfolio for equities instead of gold.
Subramanian said that when asset prices rise beyond a certain level, a correction is very likely. This has been the experience of stock markets around the world over the last 200 years, he added.
On January 14, Uday Kotak, the managing director and executive vice chairperson of Kotak Mahindra Bank, said the surge in stock markets raises concerns about a “bubble”. A stock market “bubble” occurs when investors drive the price of a stock much higher than its actual worth, increasing the possibility of a market crash.