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$3-trillion market-cap: What are investors seeing differently in stocks that is not showing in the real economy?

Indian stocks will continue to command value, perhaps even more than now, depending on the pace at which the real economy canters back to normal activity. Until that happens, the risk of an asset bubble will always remain.

May 28, 2021 / 01:43 PM IST
Bloomberg Intelligence's strategists said these stocks are

Bloomberg Intelligence's strategists said these stocks are "very well aligned to a few catalytic events that the market is presciently sniffing out" such as infrastructure spending, fiscal support to boost consumption and global tailwinds for exporters. (Representational image)

For the sake of analysis, it is sometimes useful to divide the economy into two slices: the financial sector and the real sector. Quite often, the developments in a country’s stock markets serve as a harbinger of what could happen in the real economy.

The trends in a country’s equity markets are among the most noticeable markers in an economy. Indian markets have vaulted to a $3 trillion market capitalisation last week. This begs the question: Is the real economy on the verge of a takeoff too?

Let’s examine this.

Ceteris paribus, Latin for other things remaining the same, is the most basic assumption in any economic modelling and analysis. For instance, the relationship between demand and price of a good.