Tyagi highlights risks owing to disconnect between markets & economy

Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi on Thursday highlighted the risks that emanated from a growing disconnect between the markets and the economy. He said the disconnect witnessed in the financial markets and the economy had possibly never been seen before.

While speaking at the second Sebi-NISM Research Conference on Behaviour of Securities Markets – Sighting of a Black Swan, Tyagi said: “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 the 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.” India has been witnessing such unprecedented market movements like many global markets as measures were being taken to tackle the pandemic and its after effects.

The sharp swings in the market from the lows of March 2020 to the historic highs in January 2021 have also increased volatility in the market. The fall, recovery and the overall market movement between March and till date have been significant and unprecedented, he said. Commenting on the current rally in the markets, Tyagi said, “The volatility witnessed during March 2020 was the highest-ever since the 2008 crisis. The volatility index (VIX) touched as high as 86.63 on March 24 and stayed above 70 till end of March. It fell below 50 around mid April, broadly moved between 25 and 30 in June-July and has been hovering around 20 to 25 since then. Even the current volatility above 20 is high compared to say, last five years, where it was largely below 20 with a few exceptional instances…”

In the context of the trends witnessed with respect to the corporate behaviour, Tyagi explained that the functioning of corporates as well as their fund-raising changed during the pandemic.

The regulator said the focus on ESG had only increased further this year. In line with the general global trend, Indian investors also showed increased interest in ESG investment. As a consequence of this, Sebi would soon announce relevant guidelines. “With a view to meeting the increasing investor demand for ESG-related information, Sebi is in active discussions with various stakeholders to bring in greater granularity in disclosures by listed companies in the ESG space, so that investors can make informed investment decisions. 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.

In the new normal, corporations allowed their employees to work from home, and meetings, including AGMs and virtual meetings, shifted online. This gave rise to concerns on whether investors had an adequate chance to address their concerns as well as whether confidentiality and security needs were met, he said.

Highlighting the increased direct participation of retail investors in equity markets, the regulator stated that a defining trend of FY21 was the rise in direct participation of individual investors in the stock markets.