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ACADEMIA Letters Paradox of Stock Market Boom amidst Covid-19 Pandemic: An Indian Perspective in Global Context Shivendra Sanjay Singh, Shiv Nadar University, Delhi NCR, India Sanjay Kumar Singh, Indian Institute of Management Lucknow, India VijayLakshmi Singh, Institute of Management Technology Ghaziabad, India The World Health Organization (WHO) declared the novel coronavirus spread as a public health emergency on January 30, 2020, and a pandemic on March 11, 2020. The virus has been a major public health issue internationally; around 186.5 million cases have been reported, out of which 4.03 million resulted into deaths as on July 10, 2021. India is also badly affected by the coronavirus with 30.8 million cases and around 407,000 deaths as on July 10, 2021. With affecting public health, the virus had a huge impact on the economies, globally. Companies either ran into losses or had to be shut, many people lost their jobs and consequently unemployment grew across the economies of the world, and poverty increased as many people fell in poverty due to deep recession triggered by the pandemic. India’s real GDP during 2020-21 fell by 7.3% as compared to 4% increase during 2019-20 (NSO). The paradox The fall of economy was very much expected and it indeed happened, but the stock market strangely didn’t follow the economy. Taking BSE Sensex as an example, on March 24, 2020, the day of announcement of first lockdown in India, it closed at 26,674.03 which, within a year rose up to 49,180.31, even though the pandemic kept getting worse and the economy had no drastic improvement, and this has continued as Sensex averaged a closing price above 50,000 in the month of June 2021 (BSE). The myth of the stock market being a barometer for the real economy has already busted. Academia Letters, August 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Shivendra Sanjay Singh, ss668@snu.edu.in Citation: Singh, S.S., Singh, S.K., Singh, V. (2021). Paradox of Stock Market Boom amidst Covid-19 Pandemic: An Indian Perspective in Global Context. Academia Letters, Article 2706. https://doi.org/10.20935/AL2706. 1 If we compare the performance of the economy and the stock market in India vis-à-vis China during the pandemic, we find that the China was the only major economy in the world to grow in 2020-21 with growth rate of 2.3% (IMF) whereas Indian economy shrank sharply; still, since March 24, 2020, India’s stock market has been performing far better than the Chinese stock market despite the fact that, by July 10, 2021, India has reported more than 30 million Covid-19 cases whereas China has reported only around 92 thousand cases. This may be due to different policies being introduced in both the countries. However, stock market boom in India is very similar to that in the US where stock market plunged initially and then soared during the pandemic (Vox). Contrary to general expectation, stock markets have repeatedly demonstrated a glaring paradox that stock performance is not really linked to macroeconomic and business fundamentals particularly during the pandemic. When most of the economies are sinking due to the pandemic shutdown, stock markets are booming. Why stock markets boom while economies sink during the pandemic? We try to answer this question by analyzing the stock market boom in India. What explains stock market boom in India? Why is the stock market in India going up when the economy is in trouble? Because the economy and the stock market, though interrelated, are not the same thing. Still, the following may explain the reasons of the paradox of stock market booms amidst real economy crisis. Rise in the number of individual investors According to the Securities and Exchange Board of India (SEBI), 10.7 million new Demat (stock trading) accounts were added between April, 2020 and January, 2021, out of which 1.7 million new Demat accounts were added in the month of January, 2021 alone. This immense growth in the number of investors is one of the reasons for the stock market is on an all-time high right now, but what encourages more and more people to invest in the market even when the economy is performing poorly? The most common reason has been the sheer rise in the number of individual investors, particularly organized sector and government sector employees, with more disposable income and also more time to trade due to work from home arrangement since March, 2020; as well as large number of millennials opportuning for short-term gains and an alternative source of income. For many investors, stock market became a very attractive investment option during the pandemic because returns from other options fell significantly due to fall in interest rates Academia Letters, August 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Shivendra Sanjay Singh, ss668@snu.edu.in Citation: Singh, S.S., Singh, S.K., Singh, V. (2021). Paradox of Stock Market Boom amidst Covid-19 Pandemic: An Indian Perspective in Global Context. Academia Letters, Article 2706. https://doi.org/10.20935/AL2706. 2 resulting from central bank’s expansionary monetary policy. Moreover, pandemic has given people more time to learn about the functionality and investment in the stock market. Learning about the stock market has become very easy and accessible to the people through various platforms like YouTube, free or low-cost crash courses, etc. Opening of a Demat account and access to it has also been made very easy and convenient to the people. The process is digitalized, one doesn’t need to step out of their home or worry about documents and brokerage charges. Many mobile applications dedicated to stock market trading have also contributed to this ease of trading for the people. Interest rates and liquidity Lowering the interest rates is one of the key measures taken by the central bank when economy is in recession or producing less than its potential. It is done to facilitate ease of taking loans for people and firms which help them to pay their cost of living and running the firm, respectively. This process is done to revive the economy. Moreover, this process has an impact on the stock market as well. When interest rates are low across the world, investors tend to invest in stock markets as they identify that investment in stocks will be profitable compared to bonds, fixed deposits, etc. On June 4, 2021, India’s central bank, Reserve Bank of India (RBI) announced no change in repo rate (4%) and reverse repo rate (3.35%); these key policy rates are unchanged for almost a year. Low repo rate leads to higher borrowing by commercial banks from the central bank, which leads to increased credit creation for the people and firms. It also leads to lower Fixed Deposit (FD) rates, currently varying from 2.5% to 5.75% for tenures ranging from 7 days to 10 years. Status quo on key policy rates have led to low FD rates for the past almost two years. Interest rates on small saving schemes (SSS) such as Public Provident Funds (PPF), Senior Citizens Saving Schemes (SCSS), National Saving Certificate (NSC), and Kisan Vikas Patra (KVP) are 7.1%, 7.4%, 6.8%, and 6.9%, respectively. Although these rates and yield on Government securities (around 6%) are better than the FD rates, investors perceive that the return from stock market investment would be significantly higher. This is mainly because, in general, long-term stock market return, say the average 10-year investment return, is about 10% per year across various stock markets. For example, Nifty 50 is now at historic highs. On July 8, 2021, Nifty 50 closed at 15682.90. On July 8, 2011, Nifty 50 had a level of 5660.65. This shows that the average annualised return from Nifty 50 is around 10.73% per year during the last ten years. There is an immense increase in liquidity not only in India but also worldwide during the pandemic. Expansionary monetary policy including direct monetization (i.e., printing money) Academia Letters, August 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Shivendra Sanjay Singh, ss668@snu.edu.in Citation: Singh, S.S., Singh, S.K., Singh, V. (2021). Paradox of Stock Market Boom amidst Covid-19 Pandemic: An Indian Perspective in Global Context. Academia Letters, Article 2706. https://doi.org/10.20935/AL2706. 3 has become an acceptable policy measure to save the economy from Covid-19 crisis. Easy liquidity worldwide has led to massive Foreign Institutional Investor (FII) inflows in India, at an all-time high of $37.6 billion during 2020-21, in fact, more than the cumulative inflows over the last six years. Massive FII inflows in the equity market is another reason why stock market is booming when economy is struggling. Rise and fall of industries During Covid-19 pandemic, many industries and companies stopped functioning or went in losses, but at the same time, people adapted new ways of living day to day life. Work from home was introduced, companies and individuals started using online communication applications like Google Meet, MS Teams, etc. to communicate, and streaming platforms like Netflix, Amazon Prime Video, etc. became a major source of entertainment for people. That’s why, technology, IT, and E-commerce companies experienced unprecedented and unforeseen growth during the pandemic. As per UNCTAD, E-commerce’s share in global retail trade went up from 14% in 2019 to about 17% in 2020. Similarly, China’s online share of retail sales rose from 19.4% to 24.6% between August, 2019 and August, 2020. Besides Technology, IT, and E-commerce companies, pharmaceutical companies are also gaining significantly, especially now when vaccines are being distributed. Consequently, stocks of companies from these industries have been performing very well and gradually overshadwing poorly performing stocks amidst the pandemic. The stocks of technology, IT, E-commerce, and pharmaceutical compnies have played a significat role in the stock market boom. Is the stock market boom permanent? The stock market prices have had an immense rise in a very short period of time, and this does bring up the question if the stock market is in a bubble? As per RBI Annual Report 2020-21, increase in money supply and foreign portfolio investment are the main reasons for the inflation in stock prices. As liquidity has increased around the globe and expansionary fiscal policy measures are taken by the Governments to revive their economy, rise in inflation is inevitable in forthcoming months. The consumer price inflation in India in May, 2021 has already exceeded the upper limit of the monetary policy tolerance range of 6%. Therefore, increase in liquidity can’t continue indefinitely and things may change drastically once the pandemic is over and real economy begins to improve. As general prices rise, central banks will have to decrease liquidity and increase the interest rates. Increase in interest rates is likely to bring down stock prices. Still, we can’t be sure of the bubble yet, as a clear picture will Academia Letters, August 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Shivendra Sanjay Singh, ss668@snu.edu.in Citation: Singh, S.S., Singh, S.K., Singh, V. (2021). Paradox of Stock Market Boom amidst Covid-19 Pandemic: An Indian Perspective in Global Context. Academia Letters, Article 2706. https://doi.org/10.20935/AL2706. 4 emerge as economies across the world start to recover. References Switzerland. Geneva. World Health Organization (WHO). Coronavirus Disease (Covid-19) Pandemic [internet]. 2021 [cited 2021, July 10]. Available from: https://www.who.int/ emergencies/diseases/novel-coronavirus-2019? Government of India, Ministry of Statistics & Programme Implementation, National Statistical Office. 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Academia Letters, Article 2706. https://doi.org/10.20935/AL2706. 5 business-standard.com/article/economy-policy/india-gets-highest-ever-fii-inflows-of-37-6billion-in-financial-yr-2021-121040100464_1.html UNCTAD. How COVID-19 triggered the digital and e-commerce turning point. [internet]. [updated 2021, March 15; cited 2021, July 10]. Available from: https://unctad.org/news/ how-covid-19-triggered-digital-and-e-commerce-turning-point Reserve Bank of India. RBI Annual Report 2020-21. [internet]. [cited 2021, July 10]. Available from: https://rbidocs.rbi.org.in/rdocs/ Academia Letters, August 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Shivendra Sanjay Singh, ss668@snu.edu.in Citation: Singh, S.S., Singh, S.K., Singh, V. (2021). Paradox of Stock Market Boom amidst Covid-19 Pandemic: An Indian Perspective in Global Context. Academia Letters, Article 2706. https://doi.org/10.20935/AL2706. 6