The Bombay Stock Exchange (BSE) market capitalisation and bank deposit levels move in diametrically

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opposite directions. In an economy that is on shaky ground, bank deposit levels go up, but when there is optimism, market cap goes up, reveals a 34-month study conducted by New Delhi-based SMC Capitals.

The elements of fear and greed (which drive the capital markets) are clearly visible in the trends seen in

the allocation of assets by

investors in terms of cash and stocks. An attempt to compare the BSE market cap levels (over the period starting January 2007), with the aggregate bank deposits in the banking system shows the relative measure of the entire market capitalisation of BSE as percentage of aggregate bank deposits in the entire banking system. This is a reflection of the level of risk appetite in the investor community.

For instance, in January 2007, BSE market cap at Rs 3,779,000 crore as a percentage of aggregate bank deposits was 152 per cent, which means BSE market cap was 1.52 times more than the entire bank deposits at that time, that was Rs 2,485,000 crore.

When the market started recovering since March 2009, the BSE market cap as a percentage of aggregate bank deposits crossed 100 per cent level and at present, these level is at about 138 per cent.

BSE market cap at the end of November was Rs 5,793,000 crore, while bank deposits stood at Rs 4,196,000 crore, data from SMC Capitals shows. Latest data on bank deposits is available only till November.

As the bull market cap kept racing ahead during 2007, these levels of BSE market cap, as a percentage of aggregate bank deposits, have kept rising. At the peak of the bull market, that is by December 2007, these levels reached 235 per cent.

Simply put, BSE market cap at Rs 7,169,000 crore was more than double the Rs 3,047,000 crore kept in bank deposits.

“What it means is that the deposits available with sche-duled banks put together can't even buy half of BSE stocks. This was probably the sign of 'excess optimism' in the capital market,” said Jagannadham Thunuguntla, equity head of SMC Capitals.

However, by the time the bear market started in 2008, this level of BSE market cap as percentage of aggregate bank deposits has consistently kept falling. By the time the markets touched the bottom in February 2009, this level fell to 74 per cent.

This means that with the aggregate bank deposits available with the banking system, one can buy all the BSE-listed stocks and will still be left with 26 per cent of the deposits. This probably marked the sign of excess fear in the system, said Thunuguntla. By this time, the BSE market cap was to the tune of Rs 2,862,000 crore, whereas the aggregate bank deposits were to the tune of Rs 3,848,000 crore.