{"id":42426,"date":"2026-08-21T17:47:27","date_gmt":"2026-08-21T12:17:27","guid":{"rendered":"https:\/\/kuvera.in\/blog\/?p=42426"},"modified":"2026-08-21T17:47:28","modified_gmt":"2026-08-21T12:17:28","slug":"raising-the-red-flag","status":"publish","type":"post","link":"https:\/\/kuvera.in\/blog\/raising-the-red-flag\/","title":{"rendered":"Raising the Red Flag"},"content":{"rendered":"

Four years ago, Nvidia was already one of the world’s most valuable chipmakers. Since then, its share price has risen roughly 20-fold, as the company emerged as one of the biggest beneficiaries of the AI boom.<\/p>\n

The extraordinary rise in Nvidia and many other tech companies that have propelled US, European and some Asian stock markets to record highs doesn\u2019t necessarily mean investors have been irrational. When a technology is still young and its economic potential is difficult to measure, investors are also paying for what it might become.<\/p>\n

If AI proves transformative, the eventual gains can be difficult to estimate. That is what makes the current AI boom difficult to judge. AI may genuinely reshape the economy. Investors may have good reasons to be optimistic about it.<\/p>\n

But the AI and tech stocks can still fall, economists at the European Central Bank warned this week.<\/p>\n

\u201cEconomic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely,\u201d the economists wrote, though they also made clear that neither the size nor the timing of any correction can be known in advance.<\/p>\n

When \u201coverconfident, overoptimistic investors\u201d push prices above their fundamentals, a crash could occur when that exuberance fades, they said.<\/p>\n

The economists argue that as AI becomes more important to the wider economy, investors may demand more compensation for bearing the risk associated with that economy-wide uncertainty. That can put downward pressure on valuations even if AI adoption continues and profits keep growing.<\/p>\n

AI, therefore, does not have to fail for AI stocks to fall. Prices can also fall because investors become less confident that future profits will justify the valuations they have already assigned to the technology.<\/p>\n

Both possibilities have historical precedents. The ECB economists point to the railway boom of the 19th century, the expansion of electricity and radio in the 1920s and the internet boom of the 1990s. These technologies genuinely changed the economy, but the investment booms built around them were followed by sharp declines in valuations.<\/p>\n

The lesson is not that AI is another dot-com bubble. It is that a technology can be real without every price attached to it being justified. And investors do not have to own Nvidia directly to be part of that story.<\/p>\n

The Magnificent Seven have a large presence in widely held global stock-market indices, giving investors exposure to them through mutual funds and exchange-traded funds. The ECB estimates that euro-area households have around \u20ac440 billion of exposure to US technology equities through their investments. Insurance companies and pension funds also have significant exposure.<\/p>\n

That creates a way for a correction in a relatively small group of companies to travel further.<\/p>\n

If a sharp fall in technology stocks prompts investors to withdraw money from funds, those funds may have to sell assets to meet redemptions. If the selling continues, pressure can spread to other parts of the market. In a severe scenario, the ECB economists say, the effects could extend beyond shareholders to financial conditions and sentiment in the euro area.<\/p>\n

Europe is not as exposed to the AI boom as the US. Its equity valuations have risen, but remain considerably below US levels, while its stock markets contain more traditional companies than the technology-heavy US market. The ECB also noted that the euro-area technology sector does not currently show the same signs of exuberance seen during the dot-com period.<\/p>\n

But that does not make Europe, or for that matter Asia and India, immune. US and euro-area stock markets have historically been highly correlated. A crash in US equities could affect European markets even if Europe does not experience the same degree of AI-driven enthusiasm. If the contagion spreads, India\u2019s won\u2019t remain unaffected either.<\/p>\n

The economists noted that today\u2019s valuations could still rise further if AI proves sufficiently transformative. Boom-bust patterns are usually visible only with hindsight. That leaves a more difficult question than whether AI is a bubble.<\/p>\n

AI may deliver the productivity gains investors expect. The companies building and deploying it may generate substantial profits. The technology may prove every bit as important as its supporters believe. The prices attached to that future can still turn out to have assumed too much, too soon.<\/p>\n

Markets are still trying to work out how much of AI’s future success is already reflected in today’s prices. For investors, that distinction between the technology and the price being paid for it may matter more than the bubble label itself.<\/p>\n

\"SIP_Kuvera\"<\/b><\/strong><\/p>\n

<\/h3>\n

The Closing Game<\/strong><\/h3>\n

 <\/p>\n

Moving back home, a couple of weeks ago, the Securities and Exchange Board of India and stock exchanges implemented a new system to determine the closing prices of shares. Ever since then, it has been mired in one controversy or another.<\/p>\n

Introduced on August 3 for stocks with futures and options contracts, the new Closing Auction Session, or CAS, uses an auction to determine the closing price after regular trading ends at 3:15 pm. The change was intended to improve price discovery and give the regulator greater ability to detect manipulation. This week, SEBI said it detected just that.<\/p>\n

On August 13, the weekly expiry day for Sensex derivatives, SEBI\u2019s surveillance system detected three sharp movements in the index\u2019s indicative equilibrium price during CAS. In an interim order this week, the regulator alleged that two firms, JPMorgan entity Copthall Mauritius Investment and Mansi Share and Stock Broking, placed aggressive orders in Sensex constituent stocks that contributed to those movements.<\/p>\n

What happened next is what makes the case unusual.<\/p>\n

Copthall placed large buy orders across Sensex constituents at prices up to 3% above the reference price, according to SEBI. During the three periods when the index moved sharply, Copthall accounted for between 85% and 99.91% of the relevant buy-order value. Many of those orders were later cancelled.<\/p>\n

Mansi took the opposite approach. SEBI says it placed aggressive sell orders across eight Sensex constituent stocks, including orders below the reference price, and then cancelled them within seconds. The regulator inferred that the orders artificially suppressed the Sensex’s indicative price for around five minutes.<\/p>\n

The two strategies were different, but both had the effect of moving the level at which the Sensex was likely to close, SEBI said. SEBI also said the firms\u2019 positions stood to benefit from movements in the index. It estimated wrongful gains of about \u20b92.96 crore for Copthall and \u20b971.64 lakh for Mansi. SEBI did not allege that the two firms acted together.<\/p>\n

The regulator has since impounded a combined \u20b93.68 crore and barred both firms from participating in CAS in the equity segment, directly or indirectly. For Mansi, the restriction applies to its proprietary trading account. The order also includes restrictions on their bank and demat accounts while the investigation continues.<\/p>\n

The firms have been given 21 days to respond, and SEBI will investigate further. But the episode offers an early glimpse of what happens when traders have a lot riding on the closing price.<\/p>\n

CAS was introduced to make the process of establishing that price more transparent and robust. SEBI has also said the auction gives it greater ability to identify manipulation. The August 13 episode shows why that ability matters: when the closing level can affect derivatives positions, the price at the end of the day is more than just a number on a screen.<\/p>\n

A closing price is supposed to capture where the market values a stock at the end of the day. The CAS episode is an early reminder that getting that price right depends not only on the auction itself, but also on the incentives of the people taking part in it.<\/p>\n


\n<\/strong>The Gold Rush<\/strong><\/h3>\n

 <\/p>\n

From stock markets we move on to financial markets. Over the past few weeks, three major Indian business groups have moved into a new business \u2013 offering gold loans.<\/p>\n

Aditya Birla Capital said this week it will enter the gold-loan market, opening 200-300 dedicated branches by March 2027 and aiming for around 1,000 over the next three years.<\/p>\n

It follows Tata Capital, which entered the business last month by agreeing to acquire 88.6% of Yogakshemam Loans, or Yogloans, for up to \u20b9318 crore. Yogloans had 162 branches and \u20b9708 crore of AUM as of March 31.<\/p>\n

Godrej Capital also entered the segment in July by acquiring the gold-loan business of Kanakadurga Finance.<\/p>\n

Three large financial groups entering the same business in such a short period is difficult to miss. The more interesting question is what they see in it. There is a straightforward part of the answer: Gold-backed lending is growing rapidly.<\/p>\n

Credit rating firm ICRA Ltd expects India’s organised gold-loan market to reach \u20b930 trillion by FY2028, growing at about 30% a year over the next two years. NBFC gold-loan AUM reached \u20b94 trillion in March 2026, growing nearly 78% in FY26.<\/p>\n

But there is an important qualification to those numbers.<\/p>\n

A large part of the recent expansion has come from the sharp rise in gold prices. ICRA says NBFC gold-loan AUM grew at a 54% compound annual rate over FY25 and FY26, while the increase in the amount of gold pledged as collateral remained muted. Branch additions were also subdued.<\/p>\n

In other words, the value of the collateral has been rising faster than the amount of gold being pledged.<\/p>\n

That does not make the market’s growth any less real. But it changes how we interpret it.<\/p>\n

ICRA expects the next phase of NBFC gold-loan growth to be driven not only by gold prices but also by new players expanding their borrower base. It points to India’s sizeable stock of privately held gold, greater borrower awareness and demand as factors that could support further credit expansion.<\/p>\n

And there is already a competitive market waiting for the newcomers. Muthoot Finance, Manappuram Finance, IIFL and other established lenders have built large businesses around gold-backed credit.<\/p>\n

The three new entrants are taking different routes. Tata is buying an existing franchise. Godrej has acquired an existing gold-loan business. Aditya Birla is building its own network.<\/p>\n

What we can see is a rapidly expanding market attracting fresh capital, distribution and competition. What we cannot yet say is whether all three companies see the same opportunity, or how profitable the business will be as more lenders compete for borrowers.<\/p>\n

India has held enormous amounts of gold for generations. The change under way is that more of that wealth is being connected to the formal credit system.<\/p>\n

The gold may be old. The lending opportunity around it is becoming much bigger.<\/p>\n

 <\/p>\n

The Price of Attention<\/strong><\/h3>\n

 <\/p>\n

From lending, let\u2019s now switch to the world of technology. And the biggest news from the tech world this week relates to a landmark trial involving Facebook and Instagram parent Meta.<\/p>\n

For years, Meta has tried to answer a deceptively simple question: how do you keep people on Facebook and Instagram for a little longer?<\/p>\n

That question sits at the centre of the US trial that began this week. The trial could force the company to reconsider some of the features that make its platforms so engaging.<\/p>\n

A coalition of 29 US states is accusing Meta of designing Facebook and Instagram to drive excessive use among children and teenagers, while misleading users and parents about the risks. The states also allege that Meta illegally collected and used data from children under 13. Meta denies the allegations.<\/p>\n

The potential financial exposure is extraordinary. Meta has said the penalties in the case could reach $1.4 trillion, close to the company\u2019s market value. The attorneys general of the states suing Meta have indicated the figure could be closer to $200 billion.<\/p>\n

But the money is only part of the story. The states are also asking the court to make Meta change the products themselves, including features such as infinite scroll, \u201clike\u201d counts, time limits for younger users and restrictions intended to keep children under 13 off the platforms.<\/p>\n

Those are not peripheral additions to Facebook and Instagram. They are part of how the platforms keep users engaged. That makes the case relevant beyond the question of whether Meta broke the law.<\/p>\n

The states’ lawyers have pointed to internal research and communications that they say show Meta was aware of problems associated with young people’s use of its platforms. One internal document cited in court said that features designed to increase time spent on the platform could conflict with users’ well-being.<\/p>\n

Former Meta engineering director Arturo Bejar has testified that company growth and engagement received greater weight than child safety in some product decisions. Meta disputes that account.<\/p>\n

Meta’s defence is not that teenagers never have bad experiences on its platforms. Its lawyers argue that those experiences do not establish that Facebook and Instagram are addictive or that Meta deliberately designed them to harm young users. The company has also challenged the states’ interpretation of its internal research.<\/p>\n

That distinction is central to the case. The court is not simply being asked whether social media can be harmful. It is being asked whether Meta’s conduct violated consumer-protection and child-privacy laws, and whether the company’s product decisions crossed that legal line.<\/p>\n

There is an unusual feature to the trial: the eight-member jury is advisory, meaning its verdict will not be binding on the judge.<\/p>\n

For investors, the bigger question is what happens if the states succeed.<\/p>\n

A fine would have a financial cost. Changes to the mechanics of engagement could be more consequential. Meta’s advertising business depends on the enormous amount of attention its platforms attract and monetise.<\/p>\n

The case, therefore, puts a business model itself under examination: how far can a technology company optimise for engagement before the methods used to create that engagement become a regulatory liability? If that boundary shifts, the consequences may extend beyond one lawsuit to the economics of attention itself.<\/p>\n

\"FD_Kuvera\"<\/p>\n

 <\/p>\n

Market wrap<\/b><\/h3>\n

 <\/p>\n

India\u2019s stock market benchmarks recorded losses this week, as investors remained cautious due to high crude oil prices and as rising bond yields in global markets raised concerns of interest rate hikes.<\/p>\n

The Nifty 50 and the BSE Sensex fell 0.5% and 0.6%, respectively, for the week. Small-caps logged a 1.2% gain while mid-caps were flat. As many as 12 of the 16 major sectors recorded losses during the week.<\/p>\n

Tata Motors Passenger Vehicles was the biggest Nifty laggard, falling 5% this week and extending its decline to 9.1% over the last six sessions after posting lower quarterly profits and announcing a hike in vehicle prices. Other automakers including Maruti, Mahindra & Mahindra and Eicher were also lower.<\/p>\n

IT stocks, which earn a big part of revenue from the US, fell on concerns over rising US bond yields that could push borrowing costs higher. HCL Tech and Infosys slumped more than 4% each while Tech Mahindra lost 3% and TCS slipped 2.5%.<\/p>\n

Other companies that ended lower include IndiGo parent InterGlobe;, FMCG stocks ITC, Hindustan Unilever, Tata Consumer and Nestle India; hospital chains Max and Apollo; drugmakers Cipla, Sun Pharma and Dr Reddy\u2019s Lab; and Bharti Airtel.<\/p>\n

Gainers were led by HDFC Life Insurance and Zomato parent Eternal. Kotak Mahindra Bank and Axis Bank rose 3% and 2.3%, respectively, while heavyweight Reliance Industries also ended in the green.<\/p>\n

 <\/p>\n

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