Mutual funds pushing up share prices benefit promoters most

The last three years have witnessed a massive inflow of funds into Mutual Funds, which is pushing up share prices without any fundamental improvement in the economy

Photo courtesy: social media
Photo courtesy: social media


A few economic news, apparently unrelated, have been reported in the last few weeks.

  • Sensex and Nifty are scaling new heights and The P:E ratios are still rising and are hovering around 25
  • FII inflows have come down considerably and as a matter of fact FY’18 may end with a negative flow.
  • Interest on small savings have been brought down by 0.2 per cent, obviously to indicate that interest rates are yet to bottom out and also as a nudge to RBI and commercial Banks to further lower the interest rates.
  • After a long time RBI has also reduced the interest on its Bonds from 8 to 7.5 per cent .
  • There has been a massive inflow into Mutual Funds. In the first 50 years from 1964 to 2014 the total corpus of such funds grew to INR 10 lakh crores. In the next 3 years this has crossed 20 lakh crores.
  • In the October-December quarter of 2017, the investment announced by Corporate India is the lowest in the last 13 years and credit offtake from the Banks is also the lowest in 13 years.
  • The rate of inflation has increased to 5.44 per cent.

Share prices normally rise when companies are expected to grow at a fast rate. But the low credit offtake and the slump in the investment decisions obviously indicate the opposite. Indeed, at a time when the banks are saddled with humongous NPAs, believed to be more than INR 10 lakh Crores even after the adjustments made in the past few years, and which is of the order of the net increase in the assets of Mutual Funds over last 3 years, it will be rather naïve to expect any significant growth in investment in the corporate sector.

Any dramatic increase in FDI also cannot be expected. Globally financial assets today are roughly 3 times the physical assets. The appetite for physical assets has considerably diminished over the years. Besides there is no indication that purchasing power of Indian consumers will increase significantly in the foreseeable future.

Ever since Mr Jaitley became the finance Minister, he has been steadfast in his belief that lowering interest rates is the only way to Growth. Despite the interest rates having come down considerably in the last four years, the evidence on ground does not support his belief.

To judge by the TV talk shows, Mr Jaitley and his lieutenants are firm believers in the doctrines of supply side economics and would persist in the desire to further bring down the interest rates. But the rising inflation may stand in his way. Thus, in the near future the inflow into Mutual Funds may slow down but will continue thus giving a further push to the share prices.

Mr. Jaitley has already promised to bring down the income tax on Corporates from 30 per cent to 25 per cent. In the US the rate has been brought down to 21 per cent, and sooner rather than later India will have to follow suit. This will also push the share prices up. On the other hand, as and when US Fed increases the interest rate or the qualifying period for Long Term Capital Gains tax is increased to 3 years in India, there will be a downward pull. But on the whole, the share prices will rise.

It is very likely that this spurt in share prices, not supported by the fundamentals, will crash sooner or later. Apart from the devastation it will wreck on a number of people, the confidence of people in general will suffer and very likely it will cause a depression if not a recession.

There may however be one positive outcome. As the share prices rise it will open an opportunity to the promoter class to sell some shares at a high price, repay the bank loans, and then when the share prices crash buy them back at a lower price. Obviously, presence of black money will facilitate the process.

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