The Indian Share Market & Real GDP Relationship..! - MYREALITY.In, Real Estate, Share Market, Mutual Fund, Insurance
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Sunday, May 28, 2017

The Indian Share Market & Real GDP Relationship..!

The Indian Share Market & Real GDP Relationship..!

From SEBI Investor Survey 2015 (SIS 2015)

Significant component of the SIS 2015 is to collect and analyse data on investor perceptions and sentiments. To gauge the relationship between stock markets and economic growth, especially whether a growth in stock markets directly translates to a growth in the economy and to figure out whether sentiments and confidence correspondingly leads to a growth of the markets or the economy, the correlation between a broad equities market index (in this case, the Sensex) and the real GDP growth of the economy is essential.

US Federal Reserve Bank’s Maria Ward Otoo 21 attempts to answer a more profound chicken-egg question vis-à-vis the relation between markets and growth. Her paper’s abstract asks a crucial question: “Does an increase in stock prices raise aggregate sentiment because people are wealthier or because they use movements in stock prices as an indicator of future economic activity and potential labour income growth 21?” While Otoo eventually concludes that a rise in stock prices leads to the well-documented “wealth effect” amongst investors, she also finds that people use equity price movements as a leading indicator of economic and wage growth.

Figure 2.6 establishes that benchmark index Sensex and GDP are positively correlated and index performance is used an indicator to guage the real GDP growth rates. This is a global phenomenon that is not limited to the Indian scenario. Stock markets’ performance is also a crucial component in the Conference Board Leading Indicators series, which is used by economists and securities markets professionals across the globe.

Although Figure 2.6 confirms the relationship between stock markets (which is often driven by sentiments and expectations) and the real economy, it does not verify the direct effect of sentiments on the real economy.

On the other hand, Figure 2.7 uses data from the Consumer Confidence Index series (current and future expectations series) from the Reserve Bank of India (RBI) Surveys and data on growth of personal consumption expenditure of Indian households to showcase the effects of sentiment on actual consumption expenditure.

According to Figure 2.7, a deteriorating confidence in 2012 led to significantly lower growth in personal consumption expenditure in that year whereas a rise in confidence in 2013 was visible in the actual consumption data of the same year.

Looking at 2014’s data, it is obvious that since the current and future expectations from the economy are on the rise, the growth rates in India reflecting this confidence are on the upswing too (7% in the last quarter).

From King and Levine’s (1993)23 seminal paper to the IMF’s24 recent, extensive research, the relationship between the development of financial systems and its effect on economic growth are gradually becoming recognized by academic researchers and policy makers across the globe.

The vast research on behavioural economics (for which the psychologist Daniel Kahneman won the Nobel Memorial Prize in Economics) unmistakably demonstrates that individual psychology (driven habitually by its biases and mental shortcuts) primarily drives the growth of securities markets.

Thus, it is imperative for regulators and governments to initiate measures for deepning and broadening of the securities market which will contribute to the economic growth .

The Indian Share Market & Real GDP Relationship..! Reviewed by Investment Guru on May 28, 2017 Rating: 5 The Indian Share Market & Real GDP Relationship..! From SEBI Investor Survey 2015 (SIS 2015) Significant component of the SIS ...

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