India’s stock market is not in sync with the real economy which will result in a correction, Reserve Bank of India (RBI) Governor Shaktikanta Das warned on Friday.
“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,” Das said in an interview with the CNBC Awaaz news channel.
“There will definitely be a correction but we can’t say when.”
The blue-chip NSE Nifty 50 index .NSE and the S&P BSE Sensex .BSESN have gained 37.1% and 35.2% respectively, as of their last close, in this financial year, starting in April.
This month,the monetary policy committee held interest rates steady due to rising inflation but Das reiterated that the central bank had enough policy space and would use it as needed.
The RBI has already reduced the repo rate by a total of 115 bps since February, on top of 135 bps in an easing cycle last year.
“We have policy space. We have to keep the arsenal dry and we have to use that judiciously in the future,” he said.
According to minutes of the latest monetary policy committee meeting, released on Thursday, it suggested that the bank sees little room for rate cuts in this environment.
Retail inflation in June rose to 6.09%, higher than the RBI’s 2%-6% mandated target range, forcing it to keep rates steady. A breach of the band for three straight quarters requires the committee to offer an explanation to the government.
At a time when the economy is severely hamstrung by the novel coronavirus pandemic, the RBI expects severe contraction in gross domestic product in the first half of this financial year.
“The economy will improve in the second half but the annual growth number will remain in negative territory,” Das said, without giving a specific forecast because of the uncertain environment.