What happens when reality catches up?

Share markets in India will be starting the new year at record levels. Foreign portfolio investors (FPI) bought Indian equity worth net Rs 1.70 trillion while they sold debt worth net Rs 1.05 trillion. Possibly because the rate of interest is at 4%, while retail inflation was at 6.93%, lower than 7.61% in October, but higher than the upper tolerance limit of 6% for the Reserve Bank (RBI), compared to 1.2% over twelve months to November 2020 in the US. Negative real interest rates in India allows businesses to borrow cheaply, thus reducing their costs. "In India, the net profits of listed companies grew 25 percent (in real terms) last quarter. This despite revenues shrinking because firms aggressively cut costs, including employee compensation," wrote Sajjid Z Chinoy. Higher profits mean higher dividends which maybe why share prices are skyrocketing. "Equity issues apart, this portends ominously for future demand." "The combined net profit of listed companies reached a record Rs 1.52 trillion -- up two and a half times on year-on-year (YoY) basis." Hindustan Unilever and Infosys joined Reliance Industries, Tata Consultancy Services and HDFC Bank to end the year with a market capitalisation value of Rs 5 trillion. High inflation in India compared to the US means the rupee will have to adjust downwards against the dollar at some point, and this along with negative real interest rates maybe the reason why FPIs are net sellers of debt. More ominously, "With the post-tax return on fixed deposits plummeting to 4%, way below consumer inflation, more and more investors are driven towards equities, notwithstanding the risks," wrote an editorial in The Economic Times. "But a number of market experts say while Indian equities are a dearer bet, they are not in bubble territory," wrote Harsha Jethmalani. Even if the economy returns to prepandemic level next year "profits of listed firms may grow at a much faster pace," because, "The brunt of the slowdown has been borne by much smaller firms, mostly privately held, according to Credit Suisse research." "On 18 December, the price to earnings (PE) ratio of the Nifty 50 stock market index reached an all-time high of 37.84," wrote Vivek Kaul. This is because it is easy to trade online at low cost, because FPIs have "invested $28.66 billion in Indian stocks since April, the highest they ever have during a single financial year, and because of first time investors who are called Robinhood investors. This is the Druesenberry effect in which "individuals who get used to a certain level of income ... find it difficult to reduce their spending when their income level declines". "The large contrarian bet taken by India's Robinhood in April to June 2020 seems to have paid off" because of the huge rise in share prices, wrote Neil Borate. What happens when reality catches up? Poor Indians!