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“Beautiful Markets Do Not Signify A Beautiful Economy": SBI Economists

By Staff

On Monday, pitching for a second round of fiscal support to help the sectors impacted by the coronavirus pandemic, economists at SBI said that the surge in equity markets is not linked to economic recovery and maybe a sign of irrational exuberance. They also warned that banks will start reporting higher non-performing assets (NPAs) after September, once the six-month moratorium on loan repayment ends.


“Beautiful Markets Do Not Signify A Beautiful Economy

The markets had shed over a fifth of their value in the early days of the COVID-19 pandemic and have recouped some of the losses in the last few weeks. Interestingly, the gains happened despite the repeated forecasts of contraction in GDP (gross domestic product) by analysts, wherein some expect a negative growth of up to 5 percent in 2020-21.

There is a weak linkage between buoyant markets and economic recovery and the phenomenon largely reflects "irrational exuberance", the economists wrote in a note, attributing the same to easy liquidity made available by RBI.

"Beautiful markets do not signify a beautiful economy," they said.

They also seemed to suggest that India cannot rely a lot on agriculture to boost the overall GDP growth, pointing out that even if the farm sector's historically best performance of 15.6 percent growth in 1951-52 were to be considered, a similar performance can only help the GDP growth by 2 percentage points.

"We must think of a second round of fiscal support at least for the beleaguered sectors," the note said.

The central government has so far announced COVID-19 relief measures worth Rs 20 lakh crore.

The note also pointed out that deposits in bank accounts are fast outpacing borrowings at present, adding that a large part of Indian population depends on interest from deposits because of the lack of a social security base in the country.

There is an interesting shift in possible consumer behaviour during lockdown that could have wider positive ramifications for the Indian banking system, it said, adding that transactions per credit or debit cards have declined and it is also possible that the purchases have shifted to daily essentials from luxury items.


Per card transactions have made a dramatic decline from Rs 12,000 to Rs 3,600 in the case of credit cards and Rs 1,000 to Rs 350 in the case of debit cards, it said.

"Now the question is how much of this consumer deleveraging in April is because of lockdown/lack of business and how much is because of consumers actually maintaining a discipline in consumer behaviour," it said, adding that this will influence the volumes of NPAs for banks going forward.

It also noted that households have started to use the gold for borrowings lately, and the percentage of secured loans for banks may go up as a result of this trend.

Read more about: sbi economy
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