Disconnect Between Stock Market and Real Economy; Correction in Store, Says RBI Governor

Sounding a note of caution, RBI Governor Shaktikanta Das on Friday said there is a disconnect between the stock market and the real economy and a correction will be witnessed, though its timing is hard to predict.

The Governor said excess liquidity in the global system appears to be fuelling stock market exuberance. “There is so much liquidity in the system, in the global economy, that’s why the stock market is very buoyant and it is definitely disconnected with the real economy. It will certainly witness correction in the future. But when the correction will take place, it is hard to predict,” Das said in an interview to news channel CNBC Awaaz.

The RBI is regularly monitoring the market behaviour and its impact on financial sector stability and will take necessary steps as and when needed, he added. “We are regularly monitoring all market behaviour. RBI is vigilant about the impact of correction on the financial sector and how to deal with it,” he said.

Referring to the winding down of six debt schemes of Franklin Templeton Mutual Fund, he said the RBI took a proactive step by opening a Rs 50,000 crore liquidity window for the mutual fund industry. Das also said the loan moratorium announced by RBI at the onset of the pandemic was a temporary solution for COVID-19-related stress. The moratorium ends on August 31. The central bank earlier this month permitted one-time restructuring of both corporate and retail loans. “As far as I know, all banks will get in place a board-approved restructuring framework by August 31 and subsequently implement them,” he said.

Who all will benefit from the restructuring will be decided by the banks, he said, adding eligibility has already been defined by the RBI in its notification on August 6. Restructuring benefit can be availed by those whose account was standard on March 1 and defaults should not be over 30 days, as per the notification.

Das also said the earlier announced KV Kamath committee will give recommendations on some financial parameters like debt service coverage ratio, debt equity ratio post resolution and interest coverage ratio. The five-member panel is only looking at the large corporate loans and not the retail advances, he added.

Its recommendations will be notified within 30 days of setting up of the panel, which means the notification should be out by September 6, he added. On interest rate cuts, Das reiterated that there is headroom for further monetary policy action but the “arsenal” has to be kept dry and used judiciously for promoting growth.

It would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation, he noted. Talking about the economic outlook, Das said the RBI has projected that the Gross Domestic Product (GDP) will be in the negative territory this fiscal.