Rising market-economy disconnect has no precedence, poses risk: Sebi chief

Market regulator is in active talks with stakeholders to bring in greater granularity in disclosures by listed firms in ESG (environmental, social and corporate governance)

Sebi chairman Ajay Tyagi said on Thursday that the increasing disconnect between the financial markets and the real economy being witnessed today has no precedence and concurred with other regulators that it poses a risk to the systemic stability.

“Typically, stock markets have been barometers of the economy and move in the direction the economy moves or is expected to move. However, after the onset of the pandemic, several institutions including Financial Stability Board and the RBI have raised concerns of an increasing disconnect of the financial markets with the real economy and a possible risk it may pose to systemic stability,” he said in a speech at a conference organised by Sebi and NISM.

Tyagi termed the market movement across the globe as “unprecedented” and said they are arising out of the steps taken to tackle the pandemic. He said the fall, the recovery and the overall market movement “are significant and unprecedented.”

The Sebi chief underscored the drastic change in behaviour of foreign portfolio investors (FPIs).

“FPIs have already made a net investment of more than $35 billion in this financial year in the Indian equity markets which is the highest in any financial year till date… This signals the confidence of global investors in the Indian economy and markets as a whole,” he said.

Tyagi also highlighted the growing trend of increased retail participation in the stock market.

“While the increase in demat accounts from 3 crore (30 million) to 4 crore (40 million) took around 28 months, increase from 4 crore to 5 crore took only around 10 months,” he said.

On the other hand, Tyagi said inflows through the mutual fund (MF) systematic investment planning (SIP) route have been falling.

“This reducing trend could be indicative of a trend of individual investors using funds previously being dedicated for SIPs to invest directly into the market or in other assets such as debt, real estate or even possibly holding out in cash waiting for market corrections,” he said.

Tyagi further said that the share of MFs in the total average daily turnover in the NSE cash segment had reduced from around 7.5 per cent last fiscal to 5 per cent in this financial year. Similarly, in the NSE equity derivatives segment, it has reduced around 4.3 per cent to 3 per cent for the same period. The share of individual investors in the trading turnover has seen an increase.

Tyagi said the risk aversion seen by credit funds following the pandemic and the closure of certain schemes has been reducing over time.

He also said the gush of liquidity triggered by the measures taken by global central banks, including in India, have facilitated significant bond issuances by corporates. “In this financial year till January, companies in India raised around  Rs 6.5 trillion from bond markets, an increase of more than 22 per cent over same period last year.”

Market regulator is also in active discussions with various stakeholders to bring in greater granularity in disclosures by listed companies in the area of ESG (environmental, social and corporate governance). 

“We are expecting to issue the relevant guidelines soon. The proposed guidelines are aimed at achieving much higher level of transparency and accountability from listed entities in the ESG arena,” said Tyagi.