Possibility of overconfidence leading to expectation of greater returns in stock market a serious concern: Economic Survey

“While the outlook for India’s financial sector appears bright, some areas will require focused attention going forward. The significant increase in retail investors in the stock market calls for careful consideration,” the survey said. “This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern,” it said.

Further, India’s market capitalisation to GDP ratio has improved significantly over the last five years to 124 per cent in FY24, compared to 77 per cent in FY19, far higher than that of other emerging market economies like China and Brazil. “It is essential to strike a note of caution,” it said.

“The market capitalisation to GDP ratio is not necessarily a sign of economic advancement or sophistication. Financial assets are claims on real goods and services. If equity market claims on the real economy are excessively high, it is a harbinger of market instability rather than market resilience,” it further cautioned.

The survey said the increased retail participation in financial markets and familiarity with financial products are beginning to grow in line with India’s emergence as the world’s fifth-largest economy. “Therefore, firms operating in banking, insurance, and capital markets must keep the interests of the consumers in mind and improve their service quality through fair selling, disclosure, transparency, reliability, and responsiveness,” it said.

“Their internal appraisal and incentive systems must be in alignment with these considerations. It is in their interest and in the interest of the nation that they optimise their commercial goals over the long run,” it said.

Significant interest from domestic and global investors in the Indian stock market as an attractive investment destination and sustained IPO activity placed the Indian market fifth in the world by market capitalisation in FY24, the survey said.

After enduring a highly turbulent global environment in FY23, global stock markets recovered and performed well during FY24. All the major markets, except China and Hong Kong, delivered better returns during the period compared to the previous year. FY24 saw stellar performances from the US, Brazilian and Japanese markets among the global markets.

According to the survey, the exemplary performance of the Indian stock market compared to the world and emerging markets over the years can be primarily attributed to India’s resilience to global geo-political and economic shocks, its solid and stable domestic macroeconomic outlook, and the strength of the domestic investor base. Mirroring the positive outlook on Indian markets, India’s weight in the MSCI-EM index has increased to 17.7 per cent at the end of FY24 from 13.7 per cent at the end of April 23, the second-highest share among the EMs in the index, it said.