Investor fears of a bear market: Exaggerated?

Stock indices have deflated and corporate earning frailties make many prices still look too high. This correction is good. It's just that irrationality, like prices, can also go both ways

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India's stock markets have taken a beating, the BSE Sensex having come down by more than 10,000 points from its peak last September. The broader market has fared worse, as the sharpest slide was in small-cap stocks less severe in mid-cans and relatively modest among big companies. While weakening market indices disappoint millions of investors, especially those who joined the action in recent years, this is not a disaster. It reflects neither a fundamental problem with our economy, nor any structural flaw in capital markets. Rather, this correction represents the squeezing out of excess. Four factors had conspired to inflate equity prices: one, an influx of external liquidity arising from easy-money policies aimed at pandemic relief in the rich world; two, investor funds diverted to India by economic problems in China and some other emerging markets; three, euphoria over India's growth prospects, stoked by last year's election outcome; and four, a structural shift in the saving behaviour of our middle class, which swung away from the safety of bank