Echoing concerns raised by the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI) has expressed apprehensions regarding the escalating froth observed in the small and midcap segments of the market.
In its latest monthly bulletin, the RBI highlighted the prevailing dynamics, noting, “Stocks continue to surge in a robust bull market, marked by sporadic corrections. While large-cap stocks are experiencing gains, the ascent of mid- and small-cap stocks is even more pronounced, raising concerns of frothiness and a widespread equity fervor.”
Moreover, the RBI underscored a significant shift in Foreign Portfolio Investor (FPI) holdings in Indian equities, reaching a decade-low of 16.3%. This decline suggests a surge in domestic institutional buying, notably by mutual funds, signaling a notable trend in market participation.
According to the Reserve Bank of India (RBI), the Indian rupee stands out as one of the least volatile currencies globally, demonstrating a steady appreciation trend. The RBI attributed this resilience to a notable increase in foreign direct investment (FDI), which surged by 11.4 percent year-on-year during the October-December 2023 period.
Furthermore, the RBI highlighted that bond yields have reached a nine-month low, with corporate bonds experiencing robust demand and finer cut-offs. This trend underscores the attractiveness of corporate bonds to investors.
The central bank also noted that the inclusion of Indian sovereign bonds in global bond indices has sparked significant demand for offshore rupee-denominated bonds, primarily issued by multilateral institutions seeking exposure to the Indian market.
In a related development, the Association of Mutual Funds in India (AMFI), the mutual fund industry body, revealed last month that the Securities and Exchange Board of India (SEBI) has advised mutual funds to implement measures to safeguard investors in small and midcap schemes due to concerns over market frothiness.