What is Irrational exuberance?

Why in news? The term“irrational exuberance” was recently used in an article.

Irrational exuberance, in the context of the Indian economy, refers to a situation where investor sentiment becomes excessively optimistic, driving asset prices (like stocks or real estate) significantly higher than their intrinsic value based on factors like company earnings or potential future growth. This can be fueled by a number of factors:

Strong economic performance: A period of sustained economic growth can lead investors to believe that good times will continue indefinitely, inflating asset prices.

Low interest rates: When interest rates are low, it makes holding stocks and other assets more attractive compared to fixed-income options like bonds. This can lead to increased investment and potentially a bubble.

Speculative buying: When investors buy assets not based on long-term fundamentals but rather on the expectation of short-term gains and hoping to sell them to someone else at an even higher price, it can contribute to a bubble.

Media hype: Positive media coverage about a particular sector or company can further fuel investor enthusiasm and drive prices even higher.

Why irrational exuberance can be risky?

• Bubble Burst: When investor sentiment eventually turns negative, asset prices can come crashing down. This can lead to significant financial losses for investors and potentially trigger a wider economic slowdown.
• Misallocation of Resources: When investors are irrationally exuberant, they may invest in overvalued assets rather than productive sectors of the economy, hindering long-term growth.

Is India experiencing irrational exuberance?

It’s difficult to say definitively whether India is currently experiencing irrational exuberance. The Indian economy is growing steadily, but there are concerns about some asset classes, particularly real estate in certain pockets, potentially being overvalued.